Building a passive income can be quite a challenge. Fortunately, the stock market is an easy-to-access method of doing just that. Dividends can be lucrative for investors. And the idea of simply receiving money for doing nothing but holding shares in a business is quite an attractive proposition.
There are plenty of UK shares that offer this possibility. But like anything in life, nothing is risk-free. Companies that find themselves in financial difficulties can easily decide to cut or even cancel dividends outright. And such decisions are usually paired with a substantial decline in the share price. In other words, just because a stock offers a dividend doesn’t mean it’s a reliable source of passive income.
That’s why, when I’m looking to bolster my income portfolio, I’m specifically looking for businesses that have strong financials, as well as room to grow, so that dividends can scale up over time. With that in mind, I’ve spotted shares of one UK firm that I believe meet these criteria.
Solving one of e-commerce’s biggest problems
The ongoing transition to online shopping accelerated as Covid-19 forced everyone to stay at home last year. Many non-essential retailers quickly doubled down on expanding their e-commerce offerings. But with such a sudden spike in activity, a serious problem emerged for businesses selling physical goods. I’m talking about the UK’s short supply of warehouse space.
Relatively speaking, the construction time of a new warehouse isn’t that long. However, acquiring land near a central logistics hub has become increasingly challenging, causing well-connected warehouse property values to climb considerably. And with inflation creeping into the economy, this trend appears to be accelerating.
For online retailers, that’s not fun. But for Warehouse REIT (LSE:WHR), it’s a dream come true. As the name suggests, this firm buys, rents and sells warehouses primarily for the e-commerce industry. And it returns the bulk of its profits to shareholders through dividends, generating a sizable stream of passive income.
At today’s share price of £1.66, the dividend yield sits at around 3.7%. That hardly makes it the highest yielding stock out there. But dividends have actually increased annually by an average of 50% over the last three years. Assuming the firm can continue delivering this impressive payout growth, Warehouse REIT could be an essential piece in building a passive income through the stock market.
Becoming a landlord to build passive income isn’t risk-free
By investing in Warehouse REIT, I’m effectively becoming a landlord who doesn’t have any responsibilities. That certainly sounds more enticing than pursuing a buy-to-let strategy. And it’s one of the reasons why I’m tempted to add the stock to my portfolio. But there are some caveats.
The rising demand for warehouse space hasn’t gone unnoticed by the rest of the industry. And the firm has a pretty long list of competitors. Consequently, bidding wars on properties are becoming more commonplace. As such, it’s possible management could either start missing out on opportunities or begin overpaying for new locations. Either way that doesn’t bode well for the longevity of shareholder dividends. And it potentially compromises my potential passive income stream. Therefore, this is something I’ll be watching closely.
