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Some people are making a passive income from shares without really realising it. If a company pays out a dividend and the investor is a shareholder, the income from the dividend payment is technically passive. The amount can be ramped up over time by investing more and targeting high-yield stocks. Here’s what the numbers would need to look like to get to £25k annually.
Starting with numbers
A good starting point for this strategy is to note the average yield of the FTSE 100, which is 3.31%. So, this is roughly the yield that an investor can obtain by buying an index tracker that pays out the dividend component. This means the investor needs a lump sum of £755,287 to get the targeted £25k annual second income.
This level of wealth is not likely available for the average person. Fortunately, this isn’t the only way that the goal can be obtained. Instead, investing smaller amounts over a longer period can be a strategy to reach a pot size of £755k further down the line.
For example, if someone was trying to reach the £25k goal in 20 years (maybe tying in with retirement), investing £2,250 a month could enable the portfolio to grow to the needed level over that timeframe.
Tweaking the yield
Another option could be increasing the dividend yield. If someone actively picked a smaller pool of a dozen stocks with high yields, I believe they could achieve an average portfolio yield of around 7%.
Using a 7% yield would mean an initial investment size of £357,143. Alternatively, investing £680 a month for two decades could also make the goal a reality. As can be seen, the higher the yield, the lower the amount of cash needed. However, it’s important to appreciate that the dividend yield changes over time. So in years to come, the yield could be higher or lower than anticipated.
It may be that all of these options are unachievable. In that case, dialling back the target income amount could be a wise choice.
A stock for consideration
When looking for ideas in the 7%-yield range, I like the Regional REIT (LSE:RGL). It’s a UK-listed real estate investment trust that focuses on owning and managing regional office and light industrial properties outside of London.
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It makes money primarily through the rental income from the tenants signing leases. When the property values rise, this should also help to lift the share price. This is because it’s linked to the net asset value (NAV) of the portfolio. The dividend is seen by many as sustainable because the management team must distribute at least 90% of property rental profits as dividends to keep REIT status.
Further, the multi-year leases often give good visibility over cash flow, making it easier to anticipate any needed changes to dividend payments. However, one risk is that the post-pandemic shift toward hybrid and remote working has hit office occupancy levels. This is especially true outside London, where demand recovery is slower.
Even with that concern, I think income hunters could consider the stock for their portfolio.
