The annual Stocks and Shares ISA allowance is £20,000. With share prices where they are, I think I could invest this to generate significant monthly passive income.
I think there are some great opportunities in real estate investment trusts (REITs). In my view, these can be great stocks to own for generating passive income.
There are two on my radar at the moment. Each of them pays its dividend monthly and each has a solid record of increasing its payments.
Top of my list of stocks to buy for monthly dividends would be Realty Income (NYSE:O). The company owns and rents out retail properties.
Realty Income focuses on managing its risk. It attempts to concentrate on securing high-quality tenants with strong credit ratings in order to minimise the risk of unpaid rent.
Shares of Realty Income have fallen by around 14% since the start of the year. As a result, the stock now has a dividend yield of 4.87%.
I’d look to invest £10,000 into this stock. In doing so, I’d anticipate generating around £40 in monthly passive income.
One of the biggest risks with Realty Income is the rise of e-commerce. I’d look to counter this in my portfolio by using the rest of my ISA allowance to buy shares in STAG Industrial (NYSE:STAG).
STAG is another REIT, but it focuses on industrial properties, such as warehouses. These are important for distribution and stand to do well as e-commerce continues to grow.
I don’t own shares in STAG at the moment, but I’d like to buy it for my portfolio to counter the risks of Realty Income. The risk with STAG is that the growth of e-commerce doesn’t materialise in the way that it might be expected to, but I hope that owning Realty Income in my portfolio offsets this risk for me.
Shares in STAG are also trading lower than they were at the start of the year. The stock is down 35% compared to its price at the beginning of January.
Due to its share price decline, STAG shares have a dividend of 4.9%, which is very similar to Realty Income. As a result, I expect a £10,000 investment to generate around £42 in monthly dividends.
That brings me to a total of around £82 per month. In order to bring that to £85, I’d reinvest my dividends and compound my returns. This is what I do with my existing investment in Realty Income.
By reinvesting my dividends in the same stocks, I can increase my passive income. After doing this for a year, I think that I could bring my monthly dividends to over £85.
From there, I think the sky’s the limit. Reinvesting my dividends could bring my monthly income to £90 after a year, £106 after five years, and £133 after a decade.
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Stephen Wright has positions in Realty Income. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2022