Investing in quality UK stocks and following a careful plan could be the key to unlocking a passive income stream, in my view.
Let me explain how I’d go about it.
What I’d do
I reckon dividend-paying stocks could be a great way to help me build wealth. My investment vehicle of choice would be a Stocks and Shares ISA as I wouldn’t need to pay tax on dividends received. Plus, the £20K annual allowance is attractive.
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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
After my investment vehicle is in place, I need to deposit money and start buying stocks that offer me maximum returns. I’m looking for consistent payouts, so I’d be looking for stocks with decent yields, a good track record, and positive future prospects too.
Let’s say I have £16K stashed away today I want to put to work. Next, I’m going to cut down on my love for takeaway coffees and sacrifice one per day, approximately £5. In a year, this equates to £1,820. Investing for 20 years, at a rate of 8% return, I’d be left with £164,935. Next, I’d draw down 6%, which equates to £9,896 annually. Splitting that into a weekly amount would leave me with £190 to spend on whatever my heart desires.
In theory this sounds great. However some risks that could hurt this plan include the fact that dividends are never guaranteed. Plus, individual stocks come with their own risks of impacting payouts. Furthermore, I’m hoping to achieve 8% as a rate of return. However, a lower return obtained would leave me with less money in my pot to draw down from.
Targeting the commercial property market
I reckon Primary Health Properties (LSE: PHP) would be a great stock to buy to help me maximise my pot of money.
The real estate investment trust (REIT) owns and rents out healthcare facilities. One of the draws of REITs for me is the fact they must return 90% of profits to shareholders.
From a bullish perspective, demand for healthcare is only rising, as the UK population is growing, and ageing. This could translate into growth opportunities for Primary Health, as well as the chance to grow earnings and returns.
The other aspect I like about the business is its sticky relationship with the NHS. NHS contracts usually involve a long-term lease. Plus, there are minimal chances for rent defaults, as the government is essentially paying the rent here.
From a bearish view, it’s worth mentioning that inflation and higher interest rates have hurt the property sector. For example, net asset values (NAVs) are down. This has hurt Primary’s share price, and perhaps investor sentiment. Plus, REITs use debt to fund growth. As interest rates are high, debt is currently costlier to obtain and service. These issues could hurt earnings and returns.
Overall, the shares look like they’ve got plenty to offer from a returns and growth point of view. At present, they offer a dividend yield of 6.2%.
