The UK has some terrific shares for dividend investors to consider. And they can generate real passive income – especially inside a tax-efficient Stocks and Shares ISA.
Charlie Munger – Warren Buffett’s right-hand man – used to say that the first $100,000 (or for britons £100,000) was the hardest. But is that still the case?
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Passive income opportunities
A lot of dividend stocks look pretty attractive. But a high yield can often be a sign that there’s something to worry about.
Often, but not always. The stock market doesn’t get everything right and it can make mistakes in both directions.
Games Workshop is one example. 10 years ago, the stock came with an 8% dividend yield.
That counts as high. Since then, though, the dividend per share has climbed 700%.
As a result, the stock is up 3,997%. And that means the dividend yield has actually fallen to 2.9% – less than half of where it was.
Source: Fiscal.ai
Is the stock less risky now than it was 10 years ago? Maybe, but I think this shows that not every high dividend yield is a trap.
Where’s the opportunity?
Regional REIT (LSE:RGL) is a really interesting income stock to consider. It’s a real estate investment trust that owns a portfolio of properties based outside the M25.
On the face of it, there are two main issues. It has a lot of debt and a significant part of its asset base isn’t the highest quality in the world.
Both of those are risks and the firm has lowered its dividend recently. But it’s looking to solve one problem with another.
It’s selling some of its weaker assets and using the proceeds to pay down debt. If it works, the result could be a better portfolio with less debt.
What’s not to like about that? And while there are no guarantees, the dividend yield is still 9.14% even after the recent cut.
Regional REIT takes an unusual approach, prioritising scarce supply over strong demand. The risks are obvious, but so is the potential opportunity.
A £100k portfolio
A 9.14% dividend yield turns a £100,000 portfolio into a £9,142.86 annual income. And reinvesting at that rate makes the returns go up quickly.
After 10 years, the annual return reaches £20,092.78. In Year 15, it gets to £31,118.36, and after 20 years, it becomes £48,194.04.
Inflation means £100,000 (or $100,000) is worth less in real terms than it was in 1998. That’s when Charlie Munger identified it as a turning point.
What hasn’t changed, however, is the maths behind the compounding. A 9.14% return does the same thing to £100,000 as it did 28 years ago.
In that sense, I think Munger’s advice still holds true. And it’s especially interesting in a Stocks and Shares ISA with a £20,000 annual contribution limit.
At £100,000, though, the portfolio starts to make a real contribution to the annual growth. That’s why it’s still a key level for investors.
9.14% dividend yield
Going all-in on one stock – any stock – is risky. So Regional REIT isn’t by itself a way to turn a £100,000 portfolio into a £9,142.86 second income.
What it does show, however, is that not every high dividend yield is a trap. And where there’s one opportunity, I think there might be more.
