The cost of living keeps going up and isn’t showing any obvious signs of stopping. With that in mind, I think it’s important to find ways of offsetting this by earning passive income
According to the Pensions and Lifetime Savings Association, a single person needs £31,300 in annual income for a ‘comfortable’ retirement. And dividend stocks can be a great way of doing this.
No savings? No problem!
There’s no way around the issue that earning £31,300 in passive income is going to take a lot of capital. I think it would probably need around £675,000.
Even starting from nothing though, I think it might be achievable with some disciplined regular saving. With £1,000 a month, an investor could, over time, build a significant portfolio.
Over the last couple of decades, the FTSE 100 has returned just over 6% a year. At that rate, a £1,000 monthly investment could grow into £680,000 within 25 years.
Obviously, that’s a long time. But it means the best time to get started is now – the longer investors wait, the longer it takes to achieve 25 years of returns.
Dividend stocks
The immediate question is where to invest to aim for a 6.5% return over the long term. I think dividend stocks are the best opportunity.
With interest rates currently high, the strong returns on cash and bonds might look like a good idea. But I have my doubts about this strategy. Over the long term, I’m expecting interest rates to be lower than they are at the moment. As a result, I think returns from cash and bonds to fall from their current levels.
With the best dividend stocks though, I expect their returns to grow over time. So even if yields look similar to bond returns at the moment, I think shares are clearly the better long-term choice.
Primary Health Properties
One example that stands out to me at the moment is FTSE 250 real estate investment trust Primary Health Properties (LSE:PHP). The company leases 513 properties across the UK and Ireland.
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Higher interest rates have been a challenge for the company. They weigh on the value of its assets and increase the cost of the debt it uses to fund operations.
But I see the market’s concerns here as an opportunity. The stock currently comes with a 7% dividend yield and I think there’s scope for this to grow by increasing rents.
On top of that, with 89% of rent coming from the NHS, the chance of defaults seems low. As a result, I think the share price coming down below £1 is an unusual opportunity to buy the stock.
Risks and rewards
The risk of a change in government policy leading to a decline in demand is something to be aware of with Primary Health Properties. And this is especially significant in an election year, like 2024.
On balance though, I think the stock is a great choice for long-term passive income. That’s why I own it in my portfolio and why I see the recent decline in the share price as a buying opportunity.
