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The average monthly mortgage payment on a UK house is currently £1,253. People tend to pay this from their primary source of income. This makes sense, but it’s possible for some (or all) of this to be contributed from passive income sources, such as dividend stocks. Here’s the breakdown of how it could potentially work for an investor.
Discussing important factors
An investor would need to have a portfolio of income stocks, so that on average, the dividend payments would amount to the total needed. This means that over time, the person would need to regularly invest in the stock market, to build up the portfolio size.
Therefore, this strategy could suit a younger person in their twenties who’s looking to get on the property ladder and eventually raise a family. Given it would likely take several years to hit the income goal, it could allow the investor to tap into the money in their middle age, when family spending pressures are at their highest.
A key consideration for this to work is how much someone could afford to put away each month. The second factor is how much risk could be taken to have a dividend yield high enough to make a difference. The last point is the timeline for how long a portfolio could be run before it could start generating the income needed.
All of these factors vary from person to person, so there’s not one fixed answer. One example could be investing £700 a month in a portfolio, with an average yield of 7%. In theory, after 14 years, the portfolio size would be large enough to then pay out £1,253 each month.
Of course, investing this amount as a young person isn’t easy. Further, dividend payments aren’t guaranteed. It could take a longer or shorter time period to hit the goal, depending on investing success over the years.
A stock with the target yield
The diversified portfolio would ideally include solid dividend stocks that have a good track record of paying out cash. For example, Primary Health Properties (LSE:PHP). The stock is down a modest 2% over the last year, with a current dividend yield of 7.3%.
The revenue model of the business is relatively straightforward for a property-lease business. It acquires or develops healthcare facilities and leases them out under long-term leases to tenants. These include GP practices, NHS organisations and other private healthcare providers.
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It has a strong track record of paying out dividends over the years. This makes sense, given that many of the leases are with government-funded or publicly-backed healthcare organisations. Therefore, the chances of default are small.
Looking forward, I think the long lease structure with low vacancy rates is unlikely to change. It might not be the most exciting business but it certainly does the job when it comes to sustainable income payments.
Of course, there are risks. For example, if the company engages in new development and financing costs are high or tenants don’t perform, that could negatively affect returns.
Even with this, I think it’s a good case study of a stock for consideration as part of the overall strategy.
