Making my first £1m in life is undoubtedly going to be hard. However, if I can achieve this goal, I’ll have the ability to generate up to £50k a year with the right passive income strategy.
To do this, I need a diversified portfolio that I can add to throughout my life. Furthermore, I’ll also need the shares I own to have good dividends, with the aim of an average yield of 5%.
My £1m goal
I believe it’s possible to get to my £1m goal in about 30 years of investing. While this might sound like a long time, it’s certainly worth the wait.
To begin, I’d need £10k in cash to invest, and then I’d need to add £350 per month to my shareholdings. After 30 years, this would compound into £990,000 if I achieve an average annual return of 10% over the time frame (via capital gains and dividends).
Of course, the stock market can both rise and fall, so my returns aren’t guaranteed. However, I’m willing to take on a little risk to achieve my portfolio goals. The important thing is that I diversify well to limit the problems that could arise in any one industry or region.
Realty Income is my top choice
When choosing the right dividend shares, I’m primarily looking for two things. First of all, I want an investment that has a big yield. Secondly, I’m looking for a history of price growth, which means my portfolio value could still grow if I buy a stake.
Realty Income (NYSE:O), a leading US real estate investment trust, has both of these crucial qualities. Over the past 10 years, it has gained 38% in price, and it has my target yield of 5%.
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I also reckon the shares are good value for money. In real estate, investors highly regard a valuation ratio called price-to-funds-from-operations. This is similar to the price-to-earnings ratio, except it’s adjusted specifically for the real estate market.
Realty Income has a price-to-funds-from-operations ratio of 15, which is just above the industry average of 13.5. This business is one of the most successful real estate companies in the US. So, the relatively low valuation is a reason for me to be bullish.
Navigating risks is crucial
I have to remember that my £1m goal might not be achievable if there’s a period of macroeconomic weakness. Also, I might need to pull out funds for an emergency.
Furthermore, the property market in the US could take a downturn. This might lead to lower rental yields affecting my residual income goals. Also, as Realty Income hasn’t reliably delivered an average of 10% price growth a year, I’d likely need to start in growth and value shares and transition to dividend investments later when my focus is more on generating cash flow.
I’m not buying it yet
I’m not looking to expand my dividend income right now, and I already own one property company for cash flow called Alexandria Real Estate.
However, next time I decide to buy a high-dividend investment, Realty Income will be the first company I look at. Therefore, it’s sitting high up on my watchlist.
