Cheap dividend shares are a fantastic way to earn passive income in 2025. And in many cases, these stocks also have the potential to produce impressive capital and dividend growth over the long run.
For intelligent investors, that can translate into a steady and expanding income stream which, if left to compound, could eventually start generating up to £1,150 a month. And one day, it could even replace an entire salary. Here’s how.
Earning money while sleeping
Dividends are often paid by boring large-cap companies whose best days are behind them. Yet that’s not always the case. In fact, a modest yield today could grow into something far more substantial over the next decade and beyond.
Perhaps a perfect example of this is Safestore Holdings (LSE:SAFE).
Back at the start of 2010, the stock was trading at around 156p, paying out 4.65p per share in dividends. In terms of yield, that roughly equated to 3% which isn’t exactly groundbreaking.
Yet, for the savvy investors who spotted the rising demand for self-storage solutions and Safestore’s exceptionally cash-generative business model, this dividend stock has turned into a goldmine.
Expanding cash flows have resulted in a 554% increase in shareholder payouts since 2010, enough to transform the initial 3% yield into 19.5%. At the same time, with the business expanding operations, the share price has also jumped 360%, even after the group’s recent interest rate-driven slump.
Combined, the total return for anyone reinvesting dividends along the way has reached 686%. That’s a 14.7% annualised return. And anyone who invested £500 each month into Safestore shares now has roughly £324,471 – enough to generate £13,790 a year, or £1,150 a month, in passive income when following the 4% withdrawal rule.
Still worth considering?
With its market-cap now sitting close to £1.6bn, Safestore’s a much larger enterprise compared to back in 2010. And yet, this could still be just the tip of the iceberg.
The company controls the lion’s share of the self-storage market in the UK. But that’s not the case in Europe, a region where the self-storage industry’s still in its infancy.
Management’s spotted the enormous growth opportunity across the channel and has already begun its European expansion through direct investments and joint ventures. And as such, the business already has a foothold in France, Spain, Belgium, the Netherlands, Germany, and Italy.
However, its non-UK operations currently only generate 28% of the revenue stream, or 9% excluding France. With that in mind, I don’t think Safestore’s capital and dividend growth story’s over just yet.
Of course, there are still risks to consider. As previously mentioned, shares have stumbled lately as higher interest rates have dampened activity within the home-buying and renovation markets. Given that these are primary demand-drivers for self-storage, Safestore’s been indirectly impacted, causing occupancy to suffer and growth to slow, particularly in the UK.
This highlights the group’s economic sensitivity. And with uncertainty surrounding the UK economy, Safestore shares could prove to be a lacklustre investment until the market cycle begins to recover.
Sadly, the exact timing of this remains a mystery. But with its long-term trajectory remaining intact, investors seeking a passive income may want to explore this price weakness as a potential buying opportunity.
