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Dividend shares can be great passive income investments. And a Stocks and Shares ISA is a great vehicle for UK investors.
Finding the right investments is key to generating strong returns. But not having to pay tax on dividends is also a big help.
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.
REITs
Real estate investment trusts (REITs) are a terrific asset class. They’re literally designed for passive income investors. They originated around 65 years ago in the US. Property prices were rising and ordinary people were struggling to keep up.
Sound familiar? The government’s plan to do something about it was to create a new asset class to help people own property.
REITs are organisations that own and lease property. And they’re exempt from paying tax on the income they generate.
In exchange, they have to return 90% of their income to investors as dividends. So ordinary people get a way to earn passive income from property.
This basic structure hasn’t really changed since 1960. And some REITs currently come with very attractive dividend yields.
UK property
LondonMetric Property (LSE:LMP) is one example. The stock comes with a 6.5% dividend yield, but this isn’t what makes it interesting.
Growth is often difficult for REITs. Since they pay out almost all of the cash they generate, they can’t use it to buy more properties.
LondonMetric, however, has done a good job of working around this. Over the last few years, it’s acquired several other REITs. The strategy involves incorporating the best assets and selling the others. In doing so, the firm grows and strengthens its portfolio.
It’s a risky strategy. Financing these deals involves taking on debt or issuing shares and sale prices for divestitures aren’t guaranteed.
The result, however, has been consistent dividend growth. And that makes it well worth checking out for passive income investors.
Monthly income
The annual contribution limit for a Stocks and Shares ISA is £20,000. To earn £100 a month on that requires a 6% yield.
LondonMetric Property shares come with a better starting return than this. But there are a couple of things to note.
One is that the firm pays dividends quarterly. So anyone looking for cash each month will also need other investments.
Another is that investing heavily in any one company is risky. And this is especially true for anyone starting from scratch.
The solution to both problems is the same. It involves finding more than one stock to buy, while looking for a 6% average yield.
The good news is this is absolutely possible in today’s stock market. LondonMetric Property is only one of the names worth considering.
From 0 to £100 a month
I think investors targeting passive income should look at REITs. This is, after all, exactly the purpose for which they were originally designed.
UK REITs have been attracting a lot of attention recently. And rightly so – a number of them combine high yields with consistent returns.
In my view, there are still several names that are worth considering. LondonMetric Property is one, but I think there are others.
Using a Stocks and Shares ISA, someone starting from scratch can earn £100 a month or more. The key is knowing what to look for.
This story originally appeared on Motley Fool
