Passive income shares sounds fancy. In reality, I’m just referring to stocks that pay out sustainable dividends. Over time, the cash these make can build a handy second income to my other job.
Ideally, I want to buy these stocks when they’re trading at a cheap level. That way, I can lock in a higher dividend yield than would be the case if their share prices were very high. Here are two ideas I’m looking at right now.
Rallying but still cheap
The first stock is NatWest Group (LSE:NWG). The UK banking group has a dividend yield of 6.44%. Over the past year, the stock’s jumped by 24%.
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Some might think that this can’t be a cheap stock if it’s jumped by so much over the past year. I don’t accept this, mostly because my view is the stock’s still cheap. For example, the price-to-earnings ratio is still just 6.53. This is well below my benchmark figure of 10 that I assign for a fair value.
In my eyes, I should have bought the stock last year when it was even cheaper, but this doesn’t mean it can’t have value now.
The business is really starting to motor, with news earlier this week that it’s acquired J Sainsbury‘s bank. This adds £2.5bn of gross customer assets.
It’s also continuing to enjoy the financial benefits of high interest rates. In the Q1 results, the net interest margin hit 2.05%, which was 0.06% higher than Q4 2023.
Lower interest rates could be a hit to profitability over the coming year, and the margin could fall. This is a risk, but I don’t see rates falling anywhere near as low as we had during the pandemic.
A property play
Another option is the Urban Logistics REIT (LSE:SHED). The stock’s down 1% over the past year but has a dividend yield of 6.11%.
Again, I’m not flagging it up as cheap, based on the recent absolute share price performance. Rather, I’m comparing this to the net asset value (NAV). The real estate investment trust (REIT) owns a portfolio of property. Therefore, I can get a good feel for the NAV of the overall portfolio. The share price should track this fairly closely over the long term.
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At the moment, the share price is at a 26% discount to the latest NAV figure. I think this is partly due to the negative sentiment around commercial properties over the past couple of years. The warehousing and logistics units in the portfolio are used by businesses, but in the tough climate we’ve been in recently, demand has been lower than usual. This sluggishness is a risk going forward.
I don’t see this as a long-term problem, hence why I think it’s cheap right now. With the UK economy doing much better with inflation back at 2%, I think the next couple of years will have further economic recovery.
As a result, the income from the REIT should increase, helping to fuel dividend payments. Both income ideas are on my watchlist to buy when I have more free cash.
