Earning passive income doesn’t necessarily need huge savings. Investing £250 a month in dividend stocks could generate a second income of £4,037 within 15 years.
That implies an average annual return of 6%. And while there are no guarantees, I think it’s highly possible for investors willing to persist through some volatile periods in the stock market.
Dividend stocks
I think one of the best ways of generating extra income is by buying shares in companies that distribute their earnings as dividends. That’s especially the case with interest rates falling in the UK.
UK savers have been getting a decent return by keeping their money in cash lately. But as the Bank of England stops worrying about inflation and starts focusing on growth, that’s coming to an end.
That’s likely to mean lower returns for savers who hold onto their cash. In the stock market however, lower interest rates could mean higher corporate profits – and bigger dividends as a result.
If that happens, I’d expect share prices to rise, meaning dividend yields will fall. But I think investors have a chance to take advantage of some attractive opportunities before this happens.
Primary Health Properties
There are various ways of aiming for a 6% average annual return. The most direct is buying a stock like Primary Health Properties (LSE:PHP), which currently has a 6.5% dividend yield.
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If the company keeps paying its dividend, investors who buy the stock today will get 6.5% a year in passive income regardless of what happens with interest rates. But will it maintain that dividend?
There’s a decent chance it will – the company leases GP surgeries to the NHS, so the chance of unpaid rent’s low. But the firm’s high debt levels could be a risk over the next few years.
This is where falling interest rates could help though. If the cost of servicing its debt doesn’t weigh on the firm’s profits too much, Primary Health Properties could be a great income stock for some time.
Games Workshop
The other approach is to buy shares in a business that doesn’t offer a 6% yield at today’s prices, but is capable of growing its dividend over time. Games Workshop‘s (LSE:GAW) a good example.
The current yield is only around 4%, but the dividend’s been growing over the last 10 years. And if it keeps increasing by 7% a year, the average annual return over the next 15 years will be over 6%.
The US – where Games Workshop generates a lot of its revenues – is facing some challenges at the moment. And that means there’s a genuine risk of earnings growth slowing.
Since 2014 however, the company’s grown its dividend at 23% a year on average. That means it would take quite the slowdown for it to fail to achieve 7% annual growth going forward.
No savings? No problem!
Approaching retirement with no savings might seem like a daunting prospect. But 15 years is still plenty of time to build an investment portfolio that can generate meaningful passive income.
By setting aside £250 each month and investing it in dividend stocks, a £4,037 second income could be within reach. I’d start today by buying shares in Primary Health Properties and Games Workshop.
This post was originally published on Motley Fool
