Passive income has been hard to come by in recent years. But interest rates reaching 5% might just be a golden opportunity for UK investors.
With the prices of stocks and bonds falling, yields have been rising on both. With that in mind, here are my top three ideas for UK investors looking for passive income.
Corporate bonds
Higher interest rates have caused bond returns to jump. One that stands out to me at the moment is HSBC.
At the moment, HSBC bonds are trading at an 11% discount to their par value. In other words, when they mature in 2040, I’ll get £11 for every £100 I invest today.
In the meantime, there’s a 6.7% annual yield, which I think looks attractive. And the bank has a decent credit rating, meaning the chance of a default is believed to be low.
The risk with bonds is that the yield is fixed. If interest rates rise further in the next 27 years – which I think they will – a 6.7% return might not look like such a good deal.
Nonetheless, bond returns are the best they’ve been for some time. From a passive income perspective, I think they are well worth considering.
REITs
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I also think there are some great opportunities in dividend stocks at the moment. Higher interest rates have been weighing on share prices, making them more attractive.
Specifically, I’m looking closely at the property sector. Real estate investment trusts (REITs) have seen the market value of their assets fall as interest rates rise.
REITs operate differently to most common stocks. In exchange for exemption from corporation tax, they are required to distribute 90% of the rental income they generate as dividends to shareholders.
At the top of my list is Warehouse REIT. The company operates in the industrial distribution sector and pays a dividend with an 8.2% yield at today’s prices.
An impending recession presents a risk in the near future, with the possibility of tenants defaulting on their rent. But the stock looks good to me for the long term.
The rise of e-commerce looks like a durable trend and Warehouse REIT should benefit from this. So I see the shares as a good passive income opportunity at today’s prices.
Preferred stocks
Top of my list of passive income opportunities in the current market are preferred shares. Specifically, I’m looking at Aviva’s preferred shares, which have a 7.3% dividend yield.
Preferred shares are a kind of cross between bonds and common stocks. Unlike bonds, they don’t have a maturity date, but unlike common stocks, the amount they pay out is fixed.
The biggest risk with this type of investment is rising interest rates. This could cause the price to fall and with no maturity date and no dividend growth, this could go on indefinitely.
From a passive income perspective, though, this just makes them more attractive. If prices go down and stay down, yields will go higher and stay higher.
Bonds and common stocks both look like attractive to me right now. But I think preferred stocks offer the stability of bonds at the price of stocks, making them my top choice.
