Turning excess savings into a second income can be a very good idea. Even for someone starting from scratch, it’s possible to earn some good returns with enough time.
As things stand, someone in the UK aged 30 has 38 years before becoming eligible for the State Pension. And that’s a long time to build up an investment portfolio.
Property
Historically, property has been a very good source of extra income for UK investors. But higher taxes and greater regulation have made things more complicated in recent years.
Enter real estate investment trusts (REITs). These are companies that own and lease properties (which might be hospitals, offices, warehouses, or other buildings) to tenants.
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.
In exchange for tax exemptions, REITs return 90% of their income to shareholders as dividends. And this gives investors a different way to earn income by investing in property.
There’s been a lot of interest in the UK REIT sector recently in terms of takeovers and acquisitions. But I think there are still some opportunities that are worth checking out.
Supermarkets
When it comes to leasing buildings, supermarkets probably aren’t the first type of property that people think of. But Supermarket Income REIT (LSE:SUPR) is worth a closer look.
As its name suggests, the company leases a portfolio of around 55 supermarkets across the UK. And its largest tenants include Aldi and Lidl as well as Tesco and Sainsbury.
The nature of the grocery market means the firm’s tenant base is relatively concentrated. While its rent collection metrics are impressive, investors shouldn’t overlook this risk.
A 7.85% dividend yield, however, goes some way to offsetting the risk. And investing regularly at that rate of return for 38 years can have some impressive results.
Regular investing
Investing £100 each month for 38 years and earning a 7.85% annual return results in a portfolio that generates £19,293 a year. Starting from nothing, I think that’s a strong result.
The situation with Supermarket Income REIT might be even better. Since the majority of its leases are linked to inflation, investors might expect an extra 2% in annual rent increases.
There is, however, no guarantee the stock will trade with a 7.85% dividend yield every month for the next 38 years. If the share price rises, the equation could look very different.
In that case, investors aiming to turn £100 a month into something that eventually returns £19,293 a year would need to look elsewhere. But that might not be such a bad thing.
Diversification
One of the benefits of regular investing is it allows for gradual diversification. Over time, different stocks come in and out of fashion for various reasons.
Buying each month should give an investor a chance to take advantage of different opportunities as they present themselves. And this creates a diversified portfolio over time.
For someone starting from scratch, buying shares and reinvesting dividends could be a good long-term strategy. And I think REITs are a good place to start looking for opportunities.
