When it comes to earning passive income, dividend stocks are my absolute favourite. After buying shares, there’s genuinely no work, and there are some quality assets available on the stock market.
An extra £1,000 per month is a nice sum to aim for, but how much do I need to invest to get to this? I think the answer might be less than someone might imagine.
A huge dividend yield
Shares in Phoenix Group (LSE:PHNX) have a dividend yield of 10.38%. So investing £10,000 today would generate £1,038 per year if the company maintains its current distribution.
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At that level, I’d need to invest £115,606 to bring in £12,000 per year (or £1,000 per month). The trouble is, buying shares in Phoenix Group isn’t really an option for me.
Put simply, I find the potential risks too high. As a retirement savings business, unforeseen future developments could mean the firm faces some huge liabilities in its annuities business.
If it can keep growing its pensions operation profitably, the stock could be a goldmine for dividend investors. Others might feel differently, but I don’t know whether or not it can do this, given the risk.
Predictability
I’m much more positive, though, about Primary Health Properties (LSE:PHP). Compared to Phoenix Group, I think the business is much more straightforward.
Primary Health Properties is a real estate investment trust (REIT). That means it makes money by leasing properties (specifically GP surgeries) and distributes its income to investors as dividends.
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The company gets around 89% of its rent from government organisations – either the NHS or the Irish equivalent. Having such a small number of sources accounting for that level of income can be risky.
On the other hand, the danger of government-backed tenants being unable to pay their rent is relatively low. And the firm can probably get away with increasing rents gradually over time.
How much do I need to invest?
Shares in Primary Health Properties currently come with a 7.52% dividend yield. So it looks as though I’d need around £159,574 invested to earn £1,000 per month, but things aren’t as simple as that.
One thing to note is that I can always reinvest the dividends I receive to grow my stake in the business. And doing this at 7% per year for 30 years means I’ll be able to eventually turn £20,000 today into £152,000.
But that’s not all – one of the reasons I like Primary Health Properties is that it has a long record of increasing its shareholder distributions each year. And I think this could well continue.
That means I could ultimately be able to earn £1,000 per month in passive income with less than £20,000 today. If the firm can manage a 1% annual dividend increase, I might be able to get there with £15,000.
Long-term investing
I own shares in Primary Health Properties and plan to buy more over time. It might generate £12,000 per year for me – or even more – but even with REITs, dividends are never guaranteed.
Nonetheless, the biggest advantage I have is time. That means whatever my ambitions, I don’t have to buy stocks that look risky just because they come with a high yield.
