How £10,000 today could become a £1,500-a-year second income by 2035

The buy-to-let market in the UK might not be in great shape. But Stephen Wright thinks property could still be a great way of earning a second income.

Posted by Stephen Wright

PHP SUPR

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We think earning passive income has never been easier

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

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UK investors looking for a second income should take a look at the property market. In particular, real estate investment trusts (REITs) could offer good opportunities. Right now, shares in a number of REITs come with dividend yields above 7.5%. And the returns could go up – rather than down – for the foreseeable future, although that’s not guaranteed. 

From £10,000 to £1,500 a year 

Investing £10,000 at 7.5% generates £750 a year. But by reinvesting the income at the same rate – into the same business or a different one – the annual returns can grow over time.

After 10 years of compounding returns at 7.5%, the annual income generated by a £10,000 investment increases to £1,437. And that’s only part of the equation.

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Through rent increases and portfolio expansion, the best REITs are able to grow their dividends over time. And this can further increase returns for investors.

REITs aren’t really known for their growth prospects and they have to manage their debt carefully. But there are a couple that have dividend yields above 7.5% that I think look resilient and are deserving of further research.

Supermarkets

Supermarket Income REIT‘s (LSE:SUPR) a stock I like. It comes with a 7.75% yield and most of the firm’s leases rise automatically with inflation, so investors shouldn’t lose out on that front.

The company’s largest tenants are Tesco and Sainsbury, accounting for around 75% of its rental income. And that kind of concentration is something to take note of.

The concern isn’t that either might default on their obligations – the chances of that seem to be pretty low. But it does weaken the firm’s negotiating position for renewing leases and this is a risk.

Strong occupancy rates and rent collection metrics however, suggest a good chance of getting the 7.75% dividend for some time. And that makes it worth considering for passive income investors.

Healthcare

Primary Health Properties (LSE:PHP) has a very different portfolio. It owns a collection of GP surgeries and there’s a 7.65% dividend yield on offer for investors who buy the stock right now

The firm’s currently acquiring Assura – the other major operation in the industry. The deal’s partly being financed using stock and this creates a risk if its share price falls. 

A lower share price means Primary Health Properties could end up using stock with a 7.6% yield to buy one with a 7% yield. But the combined business should eventually be in a strong position.

The company’s increased scale and reduced competition ought to help it negotiate lower debt costs and higher lease renewals. As a result, I think it’s well worth a closer look.

Compounding returns

Both Supermarket Income REIT and Primary Health Properties currently come with unusually high dividend yields. But there’s no guarantee this will last.  If the stocks go up, I expect the yields on offer to fall. And that means investors wanting a return above 7.5% might have to turn their attention elsewhere. 

I think though, that investors who buy either stock today have a decent chance to collect income for some time. And reinvesting that could lead to significant income in the future.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc, Primary Health Properties Plc, and Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.