There are a lot of ways to generate substantial wealth in life. However, often it comes at the expense of cash flow. Being stock-rich but cash-poor is better than having no money at all, but in reality, cash is king. Personally, I want to experience the full advantages of my financial planning. I think dividend shares that generate a stable passive income are the best way for me to do this.
Setting up a Stocks and Shares ISA
When I first started investing, I didn’t know about Stocks and Shares ISAs. I wish I did because the tax benefits are astounding. I can invest up to £20,000 per year in this type of brokerage account and pay no tax on my capital gains and dividends. In my opinion, this is undoubtedly the shrewdest way to invest as a British citizen.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
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Typically, I look for yields above 4%, but it’s possible to find much higher. I also look for investments where the share price has risen over decades so that my initial investment doesn’t lose value.
If I average a 5% yield across a £20,000 portfolio of 10 to 15 companies, and this rises by 5% a year in value, I can expect it to be worth £32,575 in 10 years and to receive dividends of £12,575 over the period.
Realty Income is my top choice
My favourite way to invest for dividends is in real estate investment trusts (REITs), which are companies that operate rental properties across various sectors.
I’m most bullish on Realty Income (NYSE:O) because it has a high dividend yield of 5%. Also, its 10-year median yield is 4.5%. My favourite element of this investment is that it pays money out to shareholders monthly. Investors famously refer to it as the ‘monthly dividend company’ in light of this.
Over the past 10 years, this investment has grown in price by nearly 43%. This is a 3.6% compound annual growth rate, which is slightly lower than my ambition of 5%. However, I have to bear in mind that as the shares appreciate in value, the dividends go up. If I bought Realty Income shares five years ago, it would currently yield 5.8%.
The downsides to dividend investing
The biggest risk here is that the company could cut its dividend payments. Past stability in yield is no guarantee of future results. Macroeconomic pressures can cause Realty Income’s tenants, which are mainly commercial companies, to go out of business. This could cause occupancy issues in a worst-case scenario, and issues with dividend payments.
This risk is currently slightly exacerbated as there’s high inflation in the US, which is where the REIT primarily operates. This is causing contractions in spending habits. That could result in businesses closing down certain stores if the country enters a recessionary period.
I’m still confident
Even given the risks, interest rates are due for cuts soon. This is usually good for REITs as it decreases the cost of borrowing, allowing businesses to finance lease terms more easily.
My dream is to have a portfolio that generates cash flow with little effort and still appreciates in value. There is no better investment than Realty Income for this, in my opinion. It’s likely one of the next investments I’ll make.
