I’ve been buying this FTSE 250 stock to start building a dividend snowball

Primary Health Properties is a FTSE 250 REIT that Stephen Wright has been buying shares in. Here’s how it fits into his long-term passive income plan.

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I’ve been buying shares in Primary Health Properties (LSE:PHP) – a FTSE 250 dividend stock with a 7% yield. To me, it looks like a great passive income investment for the long term.

Rising interest rates have caused the stock to fall by around 25% over the last 12 months. But I think the market is underestimating the potential for future returns here, so I’m looking to take advantage.

Primary Health Properties

Primary Health Properties (PHP) makes its money by owning and leasing medical properties. As a real estate investment trust (REIT) it distributes 90% of its income to shareholders as dividends.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Last September, PHP had a share price of £1.30 and came with a 5% dividend. With interest rates at 1.75% a year ago, that looks okay, but it’s a different story with today’s 5.25% rates. 

At 95p, with a 7% return, the proposition looks much more favourable, which is why the share price has been falling. Importantly, it has nothing to do with how the business has been performing.

The underlying business has actually been doing quite well. Occupancy rates are high, rent collection is strong, and the market value of its properties has been more resilient than those in other sectors.

If interest rates keep rising, there’s a risk PHP’s debt could become expensive. But the company offsets the threat to its balance sheet, with 97% of its debt fixed or hedged for the next seven years.

I think interest rates are unlikely to stay high indefinitely, though. So I’ve been buying the stock for my portfolio to lock in a high dividend return while the share price is low.

Rolling a snowball

Ultimately, the aim is to grow my investment portfolio into something that can generate meaningful passive income. My investment in PHP is a part of this.

I’ve started slowly, but I’m aiming to build something substantial over time. For the next few years, the plan is to reinvest the dividends I receive to buy more shares and boost my dividend income.

Building a passive income portfolio this way takes time. The initial increases might be small, but after a while they start to get much bigger.

Warren Buffett compares this to rolling a snowball down a hill. It starts off small and needs pushing, but as it gathers its own momentum and rolls faster and faster as it gets bigger and bigger.

The same is true with investing in dividend stocks to build a passive income portfolio. If I invest £1,000 at a 7% return and reinvest the dividends, I’ll receive £91 after five years.

That’s a small start, but continuing to reinvest at 7% can turn this into £180 after 15 years. And after 30 years, I could be earning close to £500 in passive income from my initial £1,000 investment.

Passive income

There are two parts to building a passive income portfolio. First, it involves finding stocks to buy – shares in companies that will be able to generate dividend income for shareholders for a long time.

Second, it involves being patient. Building a portfolio by reinvesting dividends takes time, but the power of compound interest means it at least gets easier as it goes along.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has positions in Primary Health Properties Plc. The Motley Fool UK has recommended Primary Health Properties Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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