Investing in stocks with the prospects of regular dividends is the gateway to building a passive income stream, in my view.
Although dividends are never guaranteed, there are plenty of stocks out there that offer an enticing yield, good prospects of payouts and growth, as well as defensive abilities.
Take Impact Healthcare REIT (LSE: IHR) as a good example. If I had £12,500 spare today, I could buy enough shares to help me earn £1K of additional income. This is based on its current yield of 8%.
Let me explain the investment case behind this particular stock.
Healthcare provisions
Impact is set up as a real estate investment trust (REIT). This means its a business set up to make money from property assets it rents out. In Impact’s case, it provides healthcare provisions, such as GP surgeries, to the NHS, as well as private healthcare firms.
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The beauty of REITs is that these type of trusts must return 90% of profits to shareholders.
Despite a murky economic picture, Impact shares haven’t fared too badly in the past 12-month period. They’re down 1%, from 88p at this time last year, to current levels of 87p.
Pros and cons
I’m a fan of Impact shares, however, there are pitfalls I must mention that could dent earnings and returns.
Firstly, growth is trickier than ever for REITs as they use debt to fund this. Servicing debt is harder at the moment, as interest rates are much higher. Some REITs may be waiting for interest rate cuts, and favourable loan rates, to begin thinking of growth once more.
Next, despite the defensive ability of healthcare, current issues within the NHS present a challenge. These include strikes, accusations of poor working conditions, and the fact that many professionals are leaving the workforce, or country. Impact could have many facilities to rent out, but if there are inadequate staff available, take up of such buildings may be hurt.
From a bullish view, a dividend yield of 8% is attractive, as mentioned earlier. For context, the FTSE 100 average is 3.9%, and the FTSE 250 average is closer to 3.3%.
Next, the shares look good value for money right now on a price-to-earnings ratio of just eight.
Finally, healthcare is an essential for all, no matter the economic outlook. As the UK’s population is rising rapidly, and ageing, I reckon there are plenty of opportunities for Impact to grow. This includes its presence, earnings, and dividends in the future.
Final thoughts
As I said earlier, dividends are only ever paid at the discretion of the business. They can be cut and cancelled to conserve cash. So, it’s important for me to consider buying shares that possess good fundamentals, as well as bright future prospects.
I believe Impact Healthcare REIT ticks all the boxes for me at present. As soon as I have some investable funds, I’d be willing to buy some shares.
