Do real estate investment trusts (REITs) make great dividend shares
Always on the hunt for interesting dividend shares, our writer takes a closer look at some of the UK’s real estate investment trusts (REITs).
Posted by
James Beard
Published 17 March
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Imagine a dividend share that returns at least 90% of its profit to shareholders each year. Well, I reckon most experienced investors would probably say this isn’t sustainable and warn that the payout’s likely to be cut.
However, there’s one particular type of stock – a real estate investment trust (REIT) — that must do this to avoid having to pay corporation tax. And with this potentially lucrative privilege available, perhaps not surprisingly, there are many REITs listed on the UK stock market.
One that’s recently grabbed the headlines is Care REIT, which specialises in healthcare properties. On 10 March, its share price soared 32.5% after news of a takeover approach was revealed. CareTrust, a US-listed equivalent, sees the acquisition as a means of gaining entry to the UK market. However, even with the jump in its share price, the stock still trades at a discount to its net asset value (NAV).
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.
Undervalued or unloved?
And this appears to be a common problem with REITs.
Despite the attractive yields on offer, their stock market valuations tend not to fully reflect the value of their underlying assets. On the plus side, this could represent a buying opportunity. But it might also be a sign that sceptical investors have concerns about the prospects for the notoriously cyclical property market.
Take Tritax Big Box REIT (LSE: BBOX) as an example to consider. It invests in large distribution centres (warehouses), and boasts Amazon and Ocado among its tenants. Yet despite forecasts predicting that the global logistics market will be worth $6trn by 2030, this particular REIT trades at a 22% discount to its NAV.
But the trust has ambitious growth plans. In January, as part of its intention to expand into the AI market, it submitted a planning application to build a £365m data centre near Heathrow airport.
However, as with all REITs, it’s vulnerable to a slump in the property market caused by a wider economic slowdown. Unoccupied premises and tenants failing to pay rents on time is a potentially disastrous combination.
And although Tritax Big Box’s yield (5.4%) is above the FTSE 250 average, are other REITs that offer a better return.
Passive income opportunities
Warehouse REIT also specialises in the logistics sector and is currently yielding 6.1%.
Based on its last four quarterly dividends,
Supermarket Income REIT is presently offering a yield of 8%.
Regional REIT is yielding 7.6%. But its share price has struggled since the pandemic. That’s because its portfolio comprises mainly offices and business parks. And with the move towards increased working from home, the demand for its properties has fallen. Rents in the sector have also come under pressure. Regional REIT’s share price fell heavily in the summer of 2024, after it announced a £110.5m rights issue to help refinance some of its debt.
With their above-average dividends, REITs can be attractive for income investors. Of course, payouts are never guaranteed. And if interest rates stay higher for longer, this could reduce earnings. That’s because these trusts generally borrow to fund property acquisitions. Higher finance costs are therefore likely to impact on the level of dividends paid.
Despite these challenges, I think investors looking for exposure to the property market could consider REITs. Their generous dividends could make them a good option for those looking for a healthy income stream.
The Company announces its first interim dividend of 1.48 euro cents per share for the year ending 30 September 2025 which represents an annualised rate of circa 7.3% based on the 14 March share price (c. 66.9 pence sterling).The quarterly dividend is 100% covered by EPRA earnings excluding exceptional items for the quarter.
The interim dividend payment will be made on Thursday 15 May 2025 to shareholders on the register on the record date of Friday 11 April 2025. In South Africa, the last day to trade will be Tuesday 8 April 2025 and the ex-dividend date will be Wednesday 9 April 2025. In the UK, the last day to trade will be Wednesday 9 April 2025 and the ex-dividend date will be Thursday 10 April 2025.
Here’s how much an investor needs in an ISA to generate a £27,500 second income
Imagine creating a second income that’s the equivalent of the average post-tax salary in the UK. Dr James Fox explains how it might be done.
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Dr. James Fox
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Millions of Britons invest for a second income. We invest, ideally through a Stocks and Shares ISA, over a long period of time with the aim of building a portfolio that’s large enough to sustainably generate an income. It doesn’t happen overnight, but in the end, it’s worth it.
So, why £27,500? Well, based on data from the Annual Survey for Hours and Earnings (ASHE) by the Office for National Statistics (ONS), the net average monthly earnings (this is after tax) are £2,297 (or £27,573) in the UK.
Playing the long game
In order to generate £27,500 a year from a Stocks and Shares ISA, someone needs £550,000 invested and to achieve a 5% annualised dividend yield. Now, this might sound a like a hard ask, especially if we’re starting from nothing. But I assure you, it’s entirely feasible.
There are lots of hypothetical or mathematical ways of getting to £550,000. However, all of these equations require investors to make consistent contributions and to reinvest the proceeds of capital gains and dividends.
In this example, a £550,000 portfolio could be achieved by investing £1,000 per month while achieving an annualised return of 10% over 17.5 years. At this point, an investor could move to a dividend-focused portfolio, or bonds, in order to take a tax-free second income.
Source: thecalculatorsite.com
However, we should remember the power of compounding. If an investor continues with the strategy for a longer period of time, the rate of growth would expand.
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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Investments to consider
Of course, there’s a caveat. Invest poorly and people will lose money. With this in mind, novice investors are typically advised to take a diversified approach. This often means investing in an index tracker — a fund that aims to replicate the performance of an index.
However, some actively managed funds or trusts could give investors a better chance of beating the market. One option to consider could be Berkshire Hathaway (NYSE:BRK.B) neither a fund nor trust, but a conglomerate with businesses in railroads and insurance, and stock holdings in companies like Apple, American Express, and Visa. In short, it invests in the backbone of the American economy.
While we’re currently seeing turmoil in US markets amid Trumpian uncertainty and recession fears, Berkshire Hathaway stock hasn’t been sold off. That might sound strange for a company that’s so tightly linked to the US economy. But there’s a good reason. The business has been slowly selling positions in its holdings over the past 18 months. Amazingly, it now has $334bn in cash.
Investors have been questioning why the Warren Buffett-controlled company has been turning to cash. However, with a recession becoming more likely and due to a huge selloff in US stocks, Buffett may be well positioned to make strategic acquisitions or initiate new positions in stocks.
Of course, there’s a risk with Berkshire, as there is with every investment. The risk is that Berkshire’s portfolio is incredibly concentrated on the US economy. During Buffett’s career, the US economy has outperformed, but there’s no guarantee that will continue forever. Nonetheless, I’ve recently become a Berkshire shareholder myself.
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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?
abrdn European Logistics Income PLC special dividend payment date abrdn UK Smaller Cos Growth Trust PLC ex-dividend date BlackRock World Mining Trust PLC ex-dividend date Diverse Income Trust PLC ex-dividend date Globalworth Real Estate Investments Ltd ex-dividend date Gore Street Energy Storage Fund PLC ex-dividend date HgCapital Trust PLC ex-dividend date Law Debenture Corp PLC ex-dividend date NB Distressed Debt Investment Fund New Global Ltd ex-dividend date NB Distressed Debt Investment Fund New Global Ltd ex-dividend date Oakley Capital Investments Ltd ex-dividend date Palace Capital PLC ex-dividend date Patria Private Equity Trust PLC ex-dividend date Ruffer Investment Co Ltd ex-dividend date
The FTSE 100 may continue to disappoint investors looking for high-growth companies, but it remains a haven for those in search of dividends.
Whether you want to supplement your income in retirement or boost your returns by reinvesting the payouts in more shares, dividends can form an important part of any portfolio.
However, unlike interest earned on a savings account, dividends are not guaranteed – which is why choosing stocks requires extra thought and care
Telegraph Money has picked out five of London’s most compelling dividend stocks to add to your portfolio.
The five dividend stocks to buy (and the ones to avoid)
Legal & General
Yield: 9.1pc
Legal & General is a popular choiceamong income investors for good reason. It is one of the highest-yielding stocks in the FTSE 100 and has not cut its dividend once in the last decade, which bodes well for future payouts.
However, its shares were buoyed recently by news of the recent sale of its US unit for $2.3bn to Japanese mutual life insurance company Meiji Yasuda.
Shell
Yield: 4.3pc
Shell recently raised its dividend by4pc despite a 16pc drop in profits last year.
The energy giant was hit by weaker oil and gas prices and lower demand in 2024, yet it still revealed another $3.5bn share buyback and a $4.7bn reduction in net debt at its recent full-year results, demonstrating its resilience even in difficult trading environments.
Richard Hunter, of stockbroker Interactive Investor, said: “As a stock, Shell faces the additional challenge of being in a sector which is the focus of some debate from an environmental perspective, with the ever-increasing possibility that some investors will be unwilling or unable to invest in the sector on ethical grounds.
Hargreaves Services
Yield: 5.9pc
Hargreaves Services provides services to the industrial and property sectors. Its shares are not as cheap as they once were after strong half-year results piqued investor interest. The group reported revenue of £125m in the six months ended November 2024, up from £110m in the same period of 2023.
Russ Mould, of stockbroker AJ Bell, said: “That plump yield means investors can wait patiently for Hargreaves Services to optimise returns from its multi-year infrastructure deals and land bank, where it regenerates brownfield sites for commercial or residential property development.”
Assura
Yield: 7.4pc
Real Estate Investment Trusts (Reits) have been out of favour of late as higher interest rates have hit commercial property prices.
Last year its £500m acquisition of 14 private UK hospitals from Northwest Healthcare Properties REIT diversified the portfolio. This did push its net debt to £1.6bn but Assura hopes to reduce this through property disposals.
Phoenix
Yield: 10.8pc
Phoenix finished 2024 with the highest forward yield in the FTSE 100. Last year the savings and retirement business, which also owns Standard Life and SunLife, pledged to support a “progressive” and sustainable dividend policy.
Garry White, of wealth manager Charles Stanley, said: “Phoenix has attractive cash generation prospects, a sensible management team and good growth prospects of its open business, which manufactures and underwrites long-term savings and retirement products.
Red flags for dividend stocks
Mr White said it is important not to just choose stocks paying the highest yields.
“Sometimes this is a sign of distress. If the share price has fallen because the company is in difficulty, the dividend may be unsustainable.”
Instead you should look for companies with a history of maintaining or increasing their dividends.
Mr Mould said income investors may wish to measure the forecast dividend yield against four benchmarks to see if the returns on offer are worth the potential risks. These are: ten-year gilts (currently 4.63pc), rates on cash (around 5pc), inflation (3pc) and the wider equity market (currently a 3.4pc yield for the FTSE All-Share).
He said: “If a share offers a dividend yield near or above some or all four of these benchmarks, it may well be a worthy contributor to the income part of any portfolio.”
Pay close attention to dividend cover. This is a company’s ability to pay dividends out of profits. It can be calculated as prospective earnings per share (EPS) divided by prospective dividend per share (DPS).
A dividend cover of 2x is generally considered healthy. Anything below 1.0 could be cause for concern, unless the company has good cash flow and a strong balance sheet, or is a Reit, meaning it has to pay out 90pc of its earnings to maintain its tax status..
You want to check not just how profitable the company was in the most recent year but whether it has been consistently profitable over the last few.
Mr Mould said: “Company earnings can swing around, depending on their business model and how cyclical it is. Looking at average earnings cover over a decade gives a better feel for how well defended the dividend would be were something to go unexpectedly wrong.”
Other things to look at are operating free cash flow – net profit after capital expenditures – and a strong balance sheet. Watch out for high debt as well as leases and pension deficits as these must be paid and topped up.
Renewable energy investing: who is paying for the green revolution?
Investors in renewables have not been rewarded, says Bruce Packard. Will they fund the government’s plans?
(Image credit: Getty Images)
By Bruce Packard
The government has promised to make Britain into a “clean energy superpower” by 2030. The UK’s share of electricity generation from renewables currently stands at 46%, according to the government’s own statistics, and the pledge calls for at least 95% to come from low-carbon sources. Getting there will involve doubling onshore wind to 35GW, tripling solar power to 50GW and quadrupling offshore wind to 55GW.
This will also require significant investment in storage and distribution. Last year National Grid, the network operator, raised £6.8 billion in a rights issue as part of plans to invest £23 billion over the next four years upgrading its transmission network to support the transition to renewables. Meanwhile, the 138-page Action Plan that UK Department for Energy Security and Net Zero (DESNZ) published in December says 29GW-35GW of batteries will be required by 2030, compared with less than 5GW installed today.
All told, this adds up to a lot of investment: if the targets are to be met, it implies that £40 billion per year is needed between now and 2030. Therein lies the problem: where will that come from? With the government’s own borrowing constrained by nervy global bond markets, it is unclear who is going to step up to fund these clean energy aspirations.
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A significant amount of the renewables capacity that the UK has already built was funded by the stock market, amid a multi-year burst of enthusiasm for investing in green energy. In 2021 alone, there were nine initial public offerings (IPOs) of renewables investment vehicles that raised over £10 billion, according to Hardman & Co, the sponsored equity research boutique. Yet this boom has since turned to bust.
The entire market capitalisation of the 20 renewable energy infrastructure funds (REIFs) listed in the UK has now fallen to just £10 billion. Over the last two years, existing investors have seen a terrible return on their capital, and hardly any new money has been raised as markets have questioned the economics of the REIFs.
At the end of January, the average discount to net asset value (NAV) had slumped to 42%, according to data from ShareScope. The best of a bad bunch has been the Greencoat UK Wind, whose share price was “just” 20% below NAV. The worst performing was HydrogenOne Capital Growth on an eye-watering 74% discount (its cornerstone investors included Jim Ratcliffe and his chemicals giant Ineos).
Bond yields are only part of the problem
Some of this poor performance has been driven by fair-value accounting, which requires NAV to be marked down when the “risk-free rate” – effectively the ten-year UK government bond yield – has risen. An irony of fair-value accounting is that rising bond yields, caused in no small part by rising energy prices a couple of years ago, have discouraged investment in renewables. That’s a shame, since more investment should have lowered energy costs and improved the country’s trade deficit.
To be fair, rising government bond yields have also led to wider discounts to NAV across other investment trusts with illiquid holdings that are hard to value, not just the REIFs. Many private-equity investment trusts trade on much wider discounts than before: HarbourVest Global Private Equity has been as wide as 40%.
However, rising bond yields don’t explain why the REIF sector has seen dividend cuts and now trades on an average dividend yield above 10%. This looks like distressed valuations given the UK government bond yield of 4.5%. Meanwhile, the stock market is now valuing some REIF assets at below the build cost of new projects. Harmony Energy Income Trust (LSE: HEIT), a battery energy storage system (BESS) investor, reckons that new capacity costs £842,000 per MW. That compares with the £616,000 per MW that Harmony’s market value implies for its existing assets, so in response, it is in the process of trying to selling off its entire portfolio to realise value.
To understand what’s going on, it’s worth looking back to the TMT infrastructure bubble of the late 1990s. Strategy and management expert Richard Rumelt has pointed out that a terrible industry for shareholders will tend to have certain characteristics:
i) a product that’s an undifferentiated commodity;
ii) everyone has access to the same technology;
iii) buyers are price sensitive
and willing to switch suppliers at a moment’s notice to get a better deal; and iv) large sunk capital costs, but low marginal costs so that old capacity will continue to operate. He uses the example of Global Crossing and other fibre-optic cable firms, which failed spectacularly over 20 years ago as it became clear that it had over-invested in capacity and revenue collapsed. We can see similarities with the UK-listed REIFs, where demand is growing but has been outpaced by the supply of new capacity.
What does it mean for battery funds?
This was not how the story was supposed to play out. When Russia invaded Ukraine and the price of gas spiked in 2022, the REIFs enjoyed a strong tailwind. Combined cycle gas turbine (CCGT) generation became less competitive. Unlike renewables, which have a high upfront capital cost but low marginal cost (wind and sunshine are free), most of CCGT’s operating costs are the gas that is burnt to generate power. However, the challenge with renewables is that they are intermittent. Sometimes the grid can’t cope with excess power at the wrong time (early hours of the morning for wind, midday for solar). At these times, renewable assets may need to be curtailed – that is, paid to be turned off.
The BESS sector provides a good case study for the problems. These giant batteries store excess power for a short period of time, which provides grid stabilisation and flexibility. Initially, they benefited. Yet as the price of natural gas returned to its long-term average, National Grid went back to relying on natural gas to balance demand. Thus energy storage funds such as Gresham House Energy Storage (LSE: GRID), Gore Street Energy Storage (LSE: GSF) and HEIT have seen their share prices fall precipitously since the start of 2023. The ancillary services market, which provides short-term support, saw too much capacity for recent supply. Then in a nasty profit warning in February 2024, GRID complained that battery storage was being significantly underutilised in the National Grid Electricity System Operator’s Balancing Mechanism (BM). Excessive use of legacy gas-fired generation, which provides flexibility, resulted in oversupply in the wholesale market, reducing the revenue opportunity for BESS, which was unable to compete head-to-head with gas-fired generation. So BESS capacity went unseen in National Grid’s control room and unused.
Using Rumelt’s framework, battery funds were generating a commodity product (electricity) for a customer (National Grid) who was not only prepared to switch at a moment’s notice to a different energy supplier (gas) but was also unaware of available capacity from BESS. This hit the energy-storage funds particularly hard and they have had to cut dividends.
The problems with ancillary services and BM seem fixable: these are a result of market failure, which, contrary to government policy, has created an incentive for burning gas over battery technology. The broader question is whether the government can now create an incentive for investors to provide anything close to £40 billion for investment. For instance, if BESS has already struggled with overcapacity, then it stands to reason that as more MW of battery storage is added to the grid, returns could continue to disappoint. Note too that REIFs will struggle to raise more equity from investors as shareholders question the deep discounts to fair-value NAV. From that perspective, deciding to sell down assets may make more sense for some of them than investing in new, and possibly loss-making, capacity. Many REIFs are now facing continuation votes, so management may come under pressure to liquidate their entire portfolios.
Still, this could be an opportunity. As investment in new projects slows, existing capacity could see more favourable pricing. Perhaps this signals that the worst is over for BESS funds such as GRID, GSF and HEIT, or the whole REIF sector. That said, improving returns for shareholders may well come at the cost of the government failing to achieve its ambitious targets.
Is the worst over for GRID?
Gresham House Energy Storage Fund came to market in 2018, aiming to profit from the increased need for energy storage to support intermittent renewable energy generation. Operational capacity has since increased from 70MW seven years ago to around 1GW at the end of 2024.
After Russia invaded Ukraine in 2022 and gas prices doubled, GRID’s annualised monthly revenues peaked at around £210,000 per MW. It raised £150 million of equity in May 2022 and a further £80 million in May 2023. Since then revenues have collapsed by 80%, to around £30,000 per MW at the beginning of 2024. To fund ongoing construction of new capacity in such a difficult environment, the fund’s net cash of £222 million in June 2022 has swung to net debt of £140 million September 2024. That equates to 60% of the current market cap of £240 million, which of course is barely above the amount of money raised in 2022 and 2023. That’s why GRID has had to suspend its dividend, focused on cash preservation and renegotiate its debt covenants.
The expected lifespan of a battery is ten to 15 years, yet this depends on usage: both the passage of time and the number of charging and discharging cycles determine a battery’s longevity. However, GRID is now having to invest to replace its shorter-duration batteries with two-hour ones. The business case for four-hour batteries is starting to make sense, so we could see yet another round of investment required.
There’s also the risk of new technologies, such as ceramic-oxide batteries, making the lithium-ion assets that all the UK BESS funds use obsolete. This field moves fast: in France, ProLogium is building a huge 48GWh solid-state battery factory at cost of €5.2bn. Hydrogen fuel cells, developed by companies such as Ceres Power, may also play a role in reducing the strain on the grid from intermittent renewables supply.
In November last year, the management of GRID set out a three-year plan that assumes revenue of £45,000 per MW per year for uncontracted projects, in line with revenue conditions at the time. GRID is targeting £150 million of earnings before interest, tax depreciation and amortisation (Ebitda) in three years’ time, implying an enterprise value (EV) of just 2.5 times Ebitda. Then in a January trading statement, management said that revenue on uncontracted assets (504MW) had improved to £60,000 per MW in H2 2024. So it could be past the worst.
GRID has also signed a tolling agreement with Octopus Energy on 568MW (around half of its capacity), which should provide contracted, fixed-price, inflation-linked revenues. Interestingly, Gore Street said in its first-half results that it would not enter into tolling agreements given the prices observed, and suggested decisions to do so were driven by pressure from lenders that prefer to see steady revenue generation. Cycling rates are typically higher with tolling agreements, so can degrade the battery assets faster than otherwise would be the case. So the two biggest funds are taking different approaches.
GRID’s NAV stood at £621 million or 109p per share at the end of September, with operational assets valued at an average of £661,000 per MW. With the share price at 42p and the discount at huge 63% of NAV, management has recognised that investors are sceptical about fair-value accounting NAV. In response, GRID intends to improve disclosure so that investors can better assess cash flows and valuations. It also said recently that it would shift to levying fees on a mix of NAV and market value, rather than just NAV – a growing trend among funds that trade at a large discount.
2 investment trusts to consider as confidence in the UK and Europe surges
These European and UK investment trusts are on sale right now. Could they be great buys as investor confidence in US shares falls?
Posted by Royston Wild
Image source: Getty Images
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services.
Could we be embarking on a golden age for UK and European shares, funds and investment trusts? It’s early days. But a client survey from Hargreaves Lansdown suggests it may be a possibility, as economic policy from the Trump administration turns off investors.
According to the trading platform, investor confidence in North America has sunk 17% in March, as its customers“baulked at the impact that some of the new president’s policies appear to be having on markets“.
The company’s survey, on the other hand, showed confidence in the UK spiked 16% this month. The improvement in Europe was even greater, up 48%.
For Europe, Hargreaves said that “after some difficult months, [our] investors seem to have faith that the political situation is settling down“. It added that confidence in the UK economy has also surged in recent weeks.
It commented that “investors continue to favour global funds,” but added that its clients “are now starting to look at European and UK funds too“.
It’s important to say that confidence in Britain and Mainland Europe is rising from a low base. And what’s more, the US stock market still carries considerable opportunities for investors, which means interest is unlikely to fall off a cliff.
But for individuals looking to buy more local assets today, here are two top investment trusts I think are worth consideration.
1.Schroder European Real Estate Investment Trust
Years of underperformance means Schroder European Real Estate Investment Trust (LSE:SERE) trades at a 35.2% discount to its estimated net asset value (NAV) per share.
This could provide further scope for it to rise following recent gains. It was recently trading at at 67.8p per share.
Schroder’s trust owns assets in what it describes as “winning cities” like Paris and Berlin. We’re talking locations with good infrastructure, differentiated economies, wealthy populations and excellent retail and leisure facilities.
It’s an approach that — despite persistent interest rate risks — could deliver excellent long-term returns.
This investment trust may be an especially attractive pick for dividend investors.
For this financial year (to September) its dividend yield is a whopping 7.5%.
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.
2. Supermarket Income REIT
Supermarket Income REIT‘s (LSE:SUPR) another property trust trading extremely cheaply today. At 73.8p per share, it’s dealing at a 17% discount to its NAV per share. An 8.3% dividend yield provides further appeal for value investors.
As with other REITs, it’s vulnerable to a spike in interest rates. It also faces a more specific threat in the steady growth of online retail.
But on the whole, Supermarket REIT’s a rock-solid trust, in my eyes. Its focus on the highly stable food retail market provides excellent earnings and dividend visibility. It also lets its properties to industry heavyweights like Tesco and Sainsbury’s, further mitigating the threat of occupancy issues and missed rent collections.
I think it could be a great long-term investment as the UK’s increasing population drives food retail growth.
To figure out how much dividends are needed for a lucrative passive income stream, investors must understand which strategies get the highest returns.
Posted by Mark Hartley
Image source: Getty Images
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.Read More
You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services.
Many people dream of earning passive income while sleeping but few understand the specific strategies to reach that goal.
There’s actually a wide range of options, some that are fairly easy and others extremely difficult. Setting up a business, for example, can be lucrative, but it’s risky and takes a lot of initial time and effort.
Investing in dividend stocks is much easier but still involves time, money and a side order of risk.
Right now, the UK market looks like a great place to get started. For a rare moment in history, the FTSE 100 is outperforming the S&P 500 over a 12-month period.
Yet there are still many high-yield dividend stocks selling at discount prices.
Grab your calculator
Ok, so £15,000 a year — that’s a hefty chunk of passive income. How many dividend stocks are needed to achieve that? Well, dividends differ from stock to stock but we can get an idea of their value from the yield. This is the percentage each one pays on the share price.
A £100 share with a 7% yield pays out £7 each year and a portfolio of shares worth £20,000 with a 7% yield pays out £1,400.
A few quick calculations tell me that about £214,000 is needed to return £15,000 a year.
That’s a lot of dividend stocks!
Which stocks might be best?
In my portfolio, I try to aim for stocks with yields between 5% and 9% so that my average yield is around 7%. I think this is a realistic target for the average investor.
Take Legal & General, for example, with its 9% yield. It’s quite possibly the most popular dividend stock in the UK — and for good reason. It has a very long history of proving its dedication to shareholders by consistently increasing dividends.
For income investors, this is usually the most important factor. When a company cuts or reduces dividends, it can devastate a passive income strategy. L&G never misses a beat, raising dividends by around 5% to 20% every year.
Yes, it has some risks (as do they all). For example, as an asset manager, it’s heavily exposed to market movements — if asset prices slump, so could its share price.
To help counter this, it regularly buys back its own shares to boost the stock’s value. Currently, it’s planning a further £500m on top of a previous £1bn.
But it’s just one stock worth considering. Other good examples include Aviva, HSBC and Imperial Brands. Building a portfolio of 10 to 20 similar high-quality dividend stocks is the first step in this strategy.
But what about the £214,000?
That’s the slow part. To reach that goal requires regular investment, patience and compounding returns.
Say an investor puts £300 a month in a 7% portfolio with moderate 4% price appreciation. Even with dividends reinvested, it’s going to take over 20 years to reach £214k.
But as they say — time is money. So get started as soon as possible and who knows, maybe one day both time and money will be available in abundance!
Here at The Motley Fool we’re always exploring new and exciting ways for investors to achieve their passive income dreams.
