According to a Guardian report, a London coffee costs around £5.19. Personally, I’m not against that expenditure, but it’s worth thinking about what that could turn into in terms of passive income.
The average working career lasts between 40 and 50 years. And the result of investing (the equivalent of) £5.19 per (working) day could be surprisingly impressive.
The maths
For the moment, let’s ignore the weekends as non-working days. So investing £5.19 per day for five days a week for 52 weeks (let’s also ignore the complications of leap years) means £1,349 per year.
The average annual return from the FTSE 100 over the last 20 years is around 6.9%. Someone who invests £1,349 per year receives £18,109 in year 40 and £36,573 in year 50.
There’s no guarantee returns will be as good going forward as they have been in the past. One reason is that interest rates have been unusually low over the last few years.
In general, lower interest rates lead to better returns from equities, so the last few years might not be a good representation of the long-term picture. But there is something of a complication.
Compared to their US counterparts, UK shares have underperformed recently. As a result, they often trade at lower valuations, which might offer more room for expansion over the long term.
Given all of this, maybe it’s not unreasonable to hope for a 6.9% average annual return over the next 40-50 years. But the big question for investors is where to find stocks that can generate that result.
Dividend shares
An obvious choice is FTSE 100 insurer Legal & General. The company has been around for decades and the dividend yield is just below 9%, which is very attractive.
In the short term, I don’t see much risk to the dividend – the firm has £9bn in surplus capital after meeting its solvency requirements. But whether that will remain indefinitely is a separate question.
That’s why I don’t own the stock – the long-term picture is too difficult for me to assess. But I do have a much more positive view of the 7% yield offered by shares in Primary Health Properties (LSE:PHP).
The firm is a real estate investment trust (REIT) that owns a portfolio of GP surgeries that it leases – mostly to the NHS. As a REIT, the company is required to distribute 90% of its income to investors.
The big risk for investors is the possibility of rising interest rates. Primary Health Properties carries a lot of debt and having to pay this off by issuing shares could cause the dividend to fall significantly.
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Having the NHS account for the majority of its rent, however, reduces the risk of defaults. And an ageing population means I think the risk of demand for its properties falling away sharply is limited.
Investing for income
Thinking about what’s likely to happen over the next 40 or 50 years isn’t straightforward. But I think Primary Health Properties is a stock worth considering for investors with a long-term view.
I’m not against anyone buying a coffee every day. But in my case, thinking about the potential results of regular investing is enough to convince me to check out the coffee machine at work.
