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With no savings, here’s how I’d invest £1,000 a month to aim for £31,300 in annual passive income

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Image source: Getty Images

The cost of living keeps going up and isn’t showing any obvious signs of stopping. With that in mind, I think it’s important to find ways of offsetting this by earning passive income

According to the Pensions and Lifetime Savings Association, a single person needs £31,300 in annual income for a ‘comfortable’ retirement. And dividend stocks can be a great way of doing this.

No savings? No problem!

There’s no way around the issue that earning £31,300 in passive income is going to take a lot of capital. I think it would probably need around £675,000.

Even starting from nothing though, I think it might be achievable with some disciplined regular saving. With £1,000 a month, an investor could, over time, build a significant portfolio.

Over the last couple of decades, the FTSE 100 has returned just over 6% a year. At that rate, a £1,000 monthly investment could grow into £680,000 within 25 years.

Obviously, that’s a long time. But it means the best time to get started is now – the longer investors wait, the longer it takes to achieve 25 years of returns.

Dividend stocks

The immediate question is where to invest to aim for a 6.5% return over the long term. I think dividend stocks are the best opportunity.

With interest rates currently high, the strong returns on cash and bonds might look like a good idea. But I have my doubts about this strategy. Over the long term, I’m expecting interest rates to be lower than they are at the moment. As a result, I think returns from cash and bonds to fall from their current levels.

With the best dividend stocks though, I expect their returns to grow over time. So even if yields look similar to bond returns at the moment, I think shares are clearly the better long-term choice.

Primary Health Properties

One example that stands out to me at the moment is FTSE 250 real estate investment trust Primary Health Properties (LSE:PHP). The company leases 513 properties across the UK and Ireland.

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.

Higher interest rates have been a challenge for the company. They weigh on the value of its assets and increase the cost of the debt it uses to fund operations.

But I see the market’s concerns here as an opportunity. The stock currently comes with a 7% dividend yield and I think there’s scope for this to grow by increasing rents.

On top of that, with 89% of rent coming from the NHS, the chance of defaults seems low. As a result, I think the share price coming down below £1 is an unusual opportunity to buy the stock.

Risks and rewards

The risk of a change in government policy leading to a decline in demand is something to be aware of with Primary Health Properties. And this is especially significant in an election year, like 2024.

On balance though, I think the stock is a great choice for long-term passive income. That’s why I own it in my portfolio and why I see the recent decline in the share price as a buying opportunity.

The post With no savings, here’s how I’d invest £1,000 a month to aim for £31,300 in annual passive income appeared first on The Motley Fool UK.

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Stephen Wright has positions in Primary Health Properties Plc. The Motley Fool UK has recommended Primary Health Properties Plc. 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 2024