As dividends are never guaranteed, buying passive income stocks can be challenging. My approach is to buy stocks that provide consistent returns, as well as the ability to grow the level of return moving forward.
Two stocks I bought that have performed well for me, and I reckon will continue to do so, are Primary Health Properties (LSE: PHP) and Topps Tiles (LSE: TPT).
Here’s why I bought them to help me build a second income stream.
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Primary Health Properties
Primary is set up as a real estate investment trust (REIT) which means it makes money from income-producing property. The draw of REITs is that they must return 90% of profits to shareholders.
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The business leases over 500 healthcare-related buildings across the country, the majority of these to the NHS. This is particularly attractive because renting to government bodies often equates to long-term contracts and virtually zero chances of defaults, especially during times of turbulence, like now.
Primary shares have fallen 15% over a 12-month period from 107p at this time last year, to current levels of 90p.
A big reason for the drop has been recent economic volatility, including high interest rates and inflationary pressures. This has hurt the firm as debt levels, often used for operating and growth purposes, can be costlier to navigate. Plus, net asset values (NAVs) are lower. This is an ongoing risk I’ll keep an eye on.
Furthermore, staffing issues across the NHS threaten its viability. In simpler terms, if the NHS can’t staff its provisions due to pay rows and a lack of skilled workers, it may need to scale back the properties it rents from Primary, hurting its performance and returns.
Despite the risks, I reckon Primary has defensive traits, in my view. After all, healthcare is essential for everyone. In addition to this, the NHS is currently experiencing demand never seen before, due to a growing and ageing UK population. This could help Primary grow performance and returns.
At present, the shares offer a dividend yield of 7%, which is attractive. I see this, and the business continuing to grow over time.
Topps Tiles
Topps is a leading tiles and home improvement business with a wide retail presence, as well as online offering.
The shares are down 12% over a 12-month period from 49p at this time last year, to current levels of 43p.
I reckon Topps shares have struggled due to recent turbulence. Inflationary issues and weakened consumer spending have hurt investor confidence across the board. This is an ongoing risk, as higher costs can take a bite out of profit margins. Plus, with a strong brick and mortar retail presence, costs can be higher. Furthermore, online only competitors could hurt Topps’ market dominance moving forward.
Despite recent challenges, Topps recorded its highest ever revenue last year, which shows the strength of the firm’s offering, business model, and brand power, in my view.
Finally, a weakened property market should turn around at some point. The fact that demand for homes is outstripping supply could help Topps’ bottom line, as well as boost returns in the future.
Topps shares offer a juicy 7.5% dividend yield at present. I’m excited to see how the business will fare once we’re out of the current economic malaise.
