One of the hardest things when it comes to passive income is getting started. With £1,000 to invest, the returns aren’t likely to be spectacular straight out of the gate.
Over time, though, regular investing can lead to spectacular returns. And I think there are some great opportunities for investors like me at the moment.
Compounding
In the stock market, rising interest rates have been pushing dividend yields higher. Furthermore, the Bank of England is indicating that there’s a chance that they might stay at these levels for some time.
If that happens, I think the next few years could be really important for investors. With the possibility of 7% returns – or even higher – opportunities now look much better than they have done for the last few years.
Investing £1,000 in stocks with a 7% dividend yield would generate £70 in passive income immediately. That’s not much, but reinvesting that cash at the same rate could result in something much more substantial.
After 20 years, a £1,000 investment could be paying £250 per year in dividends. So if I invested that much per month for the next couple of years, I could be earning around £5,800 per year in 2073.
The key to this plan is being able to find stocks that are going to provide a 7% return over the long term. I suspect those will change over time, but a couple in particular stand out to me at the moment.
Dividend stocks
After a year of falling prices, stocks in the real estate sector have started to recover. Nonetheless, I think there are still some bargains available at the moment and real estate investment trusts (REITs) look great to me as passive income vehicles.
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One of these is Supermarket Income REIT. 12 months ago, the stock had a dividend yield of 5.5%, but a combination of a falling share price and a rising distribution has pushed that up to 7.5% today.
Around 75% of the company’s income comes from two businesses – Tesco and Sainsbury’s. That means there’s an element of risk, since the firm is continually negotiating with bigger, more powerful operators.
Despite this, the average lease for Supermarket Income REIT has around 13 years still to run. And with inflation-linked increases built into its contracts, I think the business looks set for the future.
Another on my list is Primary Health Properties – a firm specialising in healthcare facilities. The company’s portfolio is fully occupied and the vast majority of its rent comes from the NHS.
The company’s debt pile is significant and this is a risk investors need to be aware of. But there’s some way to go before this becomes a pressing problem and interest rates have started to stabilise already.
Since the start of the year, the company’s share price has been falling. But a growing dividend means there’s a 7% yield on offer right now.
Diversification
I’d start building a passive income portfolio with two UK REITs, investing £500 in each. Over time, I’d look to diversify my investments with other sectors and geographies.
Importantly, though, this is something I’d aim to do when the opportunities present themselves. With prices where they are right now, I’d look to concentrate on stocks in the British real estate sector for the time being.
