Earning money without having to work is the dream, right? Generating a healthy passive income — in other words wealth I can accrue without having to lift a finger — isn’t as fantastical as it may first sound.

I believe a great way to do this is to buy dividend stocks. The dividends these companies pay out of their profits can give your everyday expenditure a handy boost. If accrued, these passive income streams can also provide investors with a fat pot of cash to retire on.

Taking steps to become financially independent

Creating a passive income with dividend stocks does require some work in the beginning. Some choice research is critical to help me separate the dividend stars from the investment traps. It also requires me to stump up some cash to buy these shares. This could involve the need to draw up a regular savings plan to build a portfolio.

But once up and running, a collection of decent dividend stocks could significantly boost my wealth levels. It may also help me to become financially independent. It’s a fact that many of Britain’s 2,000 ISA millionaires will attest to.

A rock-solid dividend stock

Right now, I think Primary Health Properties (LSE: PHP) could be one of the best stocks to buy for a passive income. Firstly, the company has a sound record of delivering dividends above the market average. It’s a trend that City analysts expect to continue too. For 2022 and 2023, the business yields an impressive 4.9% and 5% respectively.

Secondly, Primary Health Properties has a proud record of lifting yearly dividends. In fact, it’s lifted them every year for a quarter of a century. This reflects its ultra-defensive operations which allow the profits to roll in during good times and bad.

As the name suggests, this UK dividend stock develops and lets out primary healthcare properties such as GP surgeries. As a consequence, almost all of its rents are effectively paid out by the State, meaning that it doesn’t have to worry about collections.

Primary Health is also benefiting from a chronic shortage of medical facilities that is driving rents steadily higher. The business announced today that contracted rent rolls rose 4.1% year-on-year in 2021, thanks to this supply and demand imbalance.

A top passive income share to buy

I expect Primary Health to deliver great passive income streams long into the future. Demand for primary healthcare services is likely to keep growing as Britain and Ireland’s populations steadily age. It’s an opportunity Primary Health is seeking to exploit through continual expansion too. As of today, it has an acquisition pipeline worth a mighty £444m.

Like any share, Primary Health Properties isn’t without risk, of course. Changes to government healthcare policy could have a big impact on future profits. A failure to secure decent acquisitions could also adversely affect earnings and by extension shareholder dividends.

But, all things considered, I believe this UK dividend stock is still a top passive income share for me to buy.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Primary Health Properties. 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.

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I recently wrote that I’ll be avoiding Scottish Mortgage Investment Trust because of concerns over further stock market volatility, which could particularly affect tech stocks. The almost inevitable rise of interest rates this year makes a strong case for seeking out value-focused investments. I particularly like the idea of buying into investment trusts because they are diversified, holding multiple shares, and can trade at a discount to their net asset value, thus providing a margin of safety.

An excellent investment trust

The Lowland Investment Company  (LSE: LWI), should fit the bill as a share poised to benefit from the appetite for value-focused investments as inflation persists. Top holdings include big UK shares such as Shell, GlaxoSmithKline, Phoenix Group, HSBC and BP.

Shell’s share price has risen by 18% this year, and commodities could continue to do well in an inflationary environment. The flipside of this is that the trust is very UK-focused so if investors continue to avoid the UK, as many institutional big-hitters do, then that may impact the trust’s performance. Its big exposure to financials such as banks and to oil & gas could be an issue too, as both of these industries are cyclical.

Coupled with net gearing of 15%, which could amplify losses if the trust invests in the wrong companies, this one isn’t without risks.

However, the shares trade on a discount of around 6% (although the discount has been larger in recent times). As well as that, shares in the trust yield 4.46%, which I think has appeal from an income perspective. Charges of 0.59% also compare favourably to other trusts, so I’m thinking of buying shares in it to get diversified exposure to UK value shares. 

Better than SMT?

The Schroder Income Growth Fund (LSE: SCF) is another higher-yielding UK-focused pick. The yield is about 4.1%, so that’s good versus most other stock market investments and compared to interest rates as they currently stand. The trust’s top holdings are AstraZeneca, GlaxoSmithKline, Anglo American and Shell.

The immediately obvious downside to this one is that it trades on a premium of about 1% to its net asset value. On top of that, it’s slightly more expensive with a charge of 0.79%. Its consistent record of dividend growth potentially makes that a price worth paying, especially if its underlying holdings do well and push up the net asset value of the trust.

The bottom line is these trusts are quite similar in many ways so I wouldn’t buy both – even though the two of them could well outperform Scottish Mortgage Investment Trust this year and maybe also over the longer term also. It’s a close call between them but Lowland looks to have the slight edge for me based on its lower charges and the fact it trades on a discount.

To recap I think inflation will drive the share prices of these value-focused investments. That’s why I’m keen to add a value investment trust to my portfolio. 

Andy Ross owns no share mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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.

For a lot of people, passive income is a form of pocket money. But with the right approach, I think it can be a lot more than that. In fact, simply by investing £10 a day in dividend shares I think it is possible to retire as a passive income millionaire.

It will certainly take time and I know that I might not get there. But starting in my mid to late 20s, I see the millionaire target as possible by standard retirement age. Here is how I would aim to do it.

Dividend shares as passive income ideas

First I think it is important to understand the source of the passive income I would be targeting – dividend shares.

Some companies distribute profits to shareholders as dividends. These are not guaranteed. But if they are paid regularly, they can start adding up. No one knows what a company will do in future when it comes to dividends. So, to reduce my risk, I would diversify my passive income-focused pot across different companies and business areas.

The power of compounding

In the short term, dividends can be a useful source of passive income. But if they are instead reinvested, over the long term they can be the basis of a sizeable fortune. That is because of what is known as compounding. Basically, over time if my reinvested dividends are generating still more dividends, the combined effect should get bigger each year.

For example, if I put £10 a day aside and invest it in dividend shares with an average yield of 8%, after 20 years I should hopefully have around £178,000. But, after another 20 years still contributing £10 a day, my pot will have grown to over a million pounds. None of this is guaranteed if course. But the potentially dramatic increase in value in the second 20-year period is despite me contributing only a steady £10 a day. That shows the power of compounding at work. The reinvested dividends would themselves be earning me more dividends. 

Forty years may seem a long time. But if putting aside £10 a day for that length of time can make me a millionaire, I think it is worth doing.

Finding dividend shares

As well as time and the size of my contribution, another crucial element of my calculation is the use of dividend shares yielding 8%. If I invested in shares yielding 7% on average, after 40 years my investments would be worth ‘only’ £794,000. Due to the power of compounding, just a 1% difference in dividend yield can make a huge difference to my returns in the long run.

There are FTSE 100 shares that currently yield 8% or more, such as Rio Tinto and M&G. But I am targeting an average 8% yield for 40 years, not just right now. So to hit my target, I will need to take time to evaluate which dividend shares I could buy that hopefully might sustain an 8% yield or better for four decades. Such shares are few and far between.

Incidentally, in my calculation the increase in value is all due to dividends. I have not accounted for shifts in the prices of shares I own. If they fall, it may take me longer to become a millionaire. On the other hand, if the share prices increase, I may be able to retire a millionaire without even having to wait 40 years!

Christopher Ruane has no position in any of the shares mentioned. 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.

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It has been a volatile few weeks for tech shares. A lot of the pain has centred on stock exchanges in the US, but some UK stocks have suffered too. One UK medtech share I own is now 60% lower than it was a year ago.

Is this a sign I should cut my losses – or a buying opportunity for my portfolio?

Medtech pioneer

The share in question is Renalytix (LSE: RENX). The company is not very well-known. That is partly because of its short history. It’s also because it focuses on the US medical sector, despite its London listing. Its flagship product is a kidney diagnostics platform. The company thinks it is a cost-effective way for doctors and medical care providers to diagnose certain kidney conditions.

That could potentially be a big market. Renalytix has proprietary technology and growing clinical support. It has made inroads into selling its services to medical providers. To date though, it remains in the early stages of commercialisation. In the first quarter, for example, revenue was just $0.5m. While that is better than the zero figure it recorded in the same quarter of the prior year, it is still a small amount. Even after the share price fall, Renalytix commands a market capitalisation of £286m.

Tumbling share price

The Renalytix share price was doing well until the end of July. Since then, it has steadily slid downwards. It has given up 37% since the start of this year, but the decline had already set in months before that.

After an initial flurry of excitement in the early months of Renalytix’s listing, I think increased investor focus on short-term business results has hurt the share price. Clearly the company’s product has potential. But it will take time and money to try and realise that potential. This has become clearer as Renalytix has ramped up its sales efforts by recruiting more staff. General and administrative costs in the quarter almost doubled on the year. The company identified increased headcount as a key driver for that increase.

Over time, if the sales effort pays off by generating substantial new revenue, I think it could trigger investors to start focusing once more on the long-term potential for Renalytix. But at the moment, a lot of shareholder attention is on the cost and speed of the sales push. If that continues to be the case, I think the share price could keep sliding from here.

I would still buy this UK medtech share

Despite that, I currently have no plans to sell my Renalytix shares. Indeed, I would consider using the current price weakness to increase my position.

The market size for kidney diagnostics is huge — and growing. Renalytix has an excellent product that could help it get a good share of the market. The more it sells, the greater the benefits of scale should be for it. So, if it can build revenue strongly enough, that could turn out to be very good news for profitability.

For now it remains to be seen if that will happen. The attractive economics of this business area could lead to more competition, hurting its long-term profitability. But despite that risk, I continue to see the company as an appealing UK medtech share for my portfolio.

Christopher Ruane owns shares in Renalytix. 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.

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When looking for dividend shares to buy for my portfolio, I like to focus on what I believe are the market’s highest quality companies. Ultimately, I am looking for corporations that can provide my portfolio with a passive income stream.

I believe the number of enterprises on the market that can produce a reliable passive income stream is tiny. These businesses have to exhibit a couple of qualities if they are to make it into my portfolio.

The best passive income shares to buy

First of all, they have to have a solid competitive advantage. This should help them stay ahead of the competition and earn market-leading profit margins, which will ultimately support their dividend payout to investors. 

Secondly, the best dividend shares to buy for my portfolio must have a strong balance sheet. These companies have more financial flexibility and do not have to worry about meeting their obligations to creditors when the times are tough. This could mean the dividend is more sustainable. 

The final quality I am looking for in passive income stocks for my portfolio is a track record of shareholder returns. Past performance should never be used to guide future potential, but it can be a good indicator of a company’s intentions. This is something I try to take into account when analysing potential investments. 

Here are three dividend shares yielding 7% or more that I would buy from my portfolio today. I believe all of these companies meet the passive income criteria I have outlined above. 

My favourite dividend shares

The first company on my list is a stock I already own. Regional REIT Limited (LSE: RGL) owns a portfolio of office properties located outside the M25. 

Usually, I would steer away from real estate investment trusts with too much exposure to office properties because this market does not fall inside my comfort zone. However, Regional is headed by a strong management team with an excellent track record of finding undervalued opportunities.

For example, last year, the company sold a portfolio of industrial properties for £45m. Not only did the group manage to sell these at a near-8% premium to the valuation report at the end of 2020, but it also achieved an overall 18% increase in value from the purchase price.

By renovating some larger units and improving occupancy across the portfolio, the company was able to enhance the quality of the asset and achieve a favourable price in an unfavourable market. 

Of course, there is no guarantee the organisation will repeat this success story. Rising interest rates could have an impact on property prices across the country. Demand for offices could also decline if the working from home movement persists.

Still, thanks to the company’s track record of creating value, relatively strong balance sheet, and 7.2% dividend yield, I would be happy to buy more of the stock for my portfolio. The net loan-to-value ratio at the end of September was 43%. That is a relatively modest level of gearing for any property portfolio. 

Passive income champion

Another company that exhibits all of the qualities I am looking for in the best dividend shares to buy is Diversified Energy (LSE: DEC). 

Usually, I would avoid the commodity sector when looking for long-term passive income investments. Commodity prices can be incredibly volatile. But Diversified Energy has an edge. The corporation hedges most of its gas production, which means management has a high level of visibility over future cash flows. 

That said, the firm does still have some exposure to volatile commodity prices. If the green energy transition forces hydrocarbon prices lower over the next decade or so, the company will not be able to mitigate this risk. That is probably the biggest challenge the group faces right now. 

Nevertheless, the company looks to me to be well managed. It also has a strong balance sheet supported by hedged cash flow from its hydrocarbon assets. The strategy also gives the business an edge in the market.

With profits and cash flows locked in, it can take advantage of opportunities in the commodity market its peers may have to overlook due to financing constraints. The stock offers a dividend yield of 10%, at the time of writing. 

Growth through acquisitions

I would also buy wealth management group M&G (LSE: MNG). With a dividend yield of 8.5%, the stock looks attractive as an income investment. It also has great growth potential. The company is expanding its footprint by snapping up smaller wealth managers. This could help the business grow its earnings per share and provide more capital to fund dividends. 

As the wealth management market is highly competitive, M&G needs to stay on its toes, or it could be left behind. This is probably the biggest risk the organisation faces right now. It needs to keep investing and developing its offering for consumers. If the company takes its market share for granted, competitors may start to draw customers away. 

Despite this challenge, it seems to me as if the business is well managed, has a growth plan in place, and has a relatively conservative balance sheet.

Indeed, as it operates in a highly regulated industry, it needs to prioritise balance sheet strength. This is both a benefit and a drawback for investors. It means the company is unlikely to overstretch itself. Still, regulators could act if they think the firm is paying out too much to shareholders in dividends. 

Even after taking this risk into account, I believe the company is one of the best shares to buy now for passive income. 

Rupert Hargreaves owns shares in Regional REIT. 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.

In June 2021, I wrote an article claiming that the Tesco (LSE: TSCO) share price was deeply undervalued. As it turns out, I was right on the money (quite literally in this case). 

Over the past 12 months, the stock has produced a total return for investors of 16.6%. It has slightly outperformed the FTSE All-Share Index, which returned 16.4% over the same period. 

Over the past three years, the company’s performance has been even more impressive. The stock has produced a total return of 11% per annum. That is more than double the FTSE All-Share return over the same time frame. 

I think the performance of the Tesco share price over the past three years illustrates the company’s defensive qualities. As other businesses have struggled through the pandemic, the firm has capitalised on its strengths. 

And while past performance should never be used as a guide to future potential, I think these strengths will continue to work in the company’s favour as the economic outlook becomes more uncertain. 

Uncertain economic outlook

The outlook for the global economy is becoming more uncertain by the day. The supply chain crisis and geopolitical tensions are just two risk factors businesses like Tesco must grapple with. 

At the same time, inflation pressures worldwide are pushing up the cost of goods and services, particularly commodity prices. Rising prices are squeezing company profit margins as most businesses can only pass on a small percentage of these price hikes to consumers. 

Tesco is not immune from these challenges. Still, it does have room to navigate some of these headwinds. It is large enough to negotiate special deals with suppliers to keep prices low for customers.

It also has plenty of financial flexibility to absorb costs. The group recently announced that it would be reducing store opening hours and removing fresh fish and meat counters in most large stores to reduce costs.

The enterprise is also investing significantly in other efficiency initiatives, such as its rail freight operation. The overall aim of these endeavours is to offset inflation pressures and overcome global supply chain issues. 

The Tesco banking arm also provides a valuable source of diversification and additional profitability for the group. 

Tesco share price potential

Despite the general economic uncertainty, analysts believe the company’s net profit will increase marginally over the next two years. I think these projections illustrate the organisation’s defensive nature in a challenging environment. Earnings per share should hit 22.1p in its 2023 fiscal year, up from 16.4p for 2019 according to current City projections. 

Based on these estimates, the Tesco share price is currently on a forward price-to-earnings (P/E) multiple of 13.4. It also supports a dividend yield of 3.7%. While this valuation does not look particularly cheap, considering the company’s competitive advantages, I think the stock looks like an attractive investment at current levels. 

As such, I would continue to buy the investment for my portfolio today. I think the company could provide a great safe haven for my portfolio in times of uncertainty. 

Rupert Hargreaves has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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.

The prospect of earning money without having to work for it is enticing. But is it too good to be true? Depending on how one approaches it, I don’t believe so. Investing in dividend stocks, for example, is one of my favourite passive income ideas. I can earn without lifting a finger by owning a little portion of a major corporation that pays out some of its income as dividends.

Here’s how I’d use £40 every week to invest in dividend stocks and create passive income streams.

Build good habits

My first step would be to start saving £40 each week. I could start doing this by setting up a direct debit or by stuffing money into a piggy bank regularly. In any case, I believe that developing a habit of regular saving is critical to my passive income goals. That way, when additional financial pressures emerge, as they certainly will, I can concentrate on how to keep my monthly donations going.

Although it would take some time for me to accumulate a large enough balance to make investing beneficial, I would open a share-dealing account on the first day. That way, when I’m ready to start buying dividend stocks, I’ll be able to do it quickly.

Finding dividend shares to buy

As the pounds piled up, I’d spend weeks looking for dividend stocks that fit my requirements. I’d like to avoid some of the most typical blunders individuals make when they first start investing.

For example, let’s say I come across Ferrexpo (LSE: FXPO), which has a 12% yield. If I invest £1,000 in Ferrexpo shares, I should be able to earn around £120 each year in passive income. Not too shabby at first glance. However, upon closer inspection, there are certain dangers. Ferrexpo’s profits are centred on a single Ukrainian mining site. Its capacity to produce profits and pay dividends in the future may be harmed by its concentration of production in a nation with high political risk. Furthermore, the price of iron ore has an impact on its profitability. That explains why the dividend last year was more than 10 times more than it was four years ago.

Depending on my specific investment objectives and risk tolerance, Ferrexpo could still be a suitable choice for me. The idea is that before purchasing any dividend stocks, I need to conduct extensive research. I wouldn’t just look at a company’s yield without trying to figure out where the cash for dividends comes from. I’d look for stocks with strong business strategies that might potentially maintain or boost dividends in the future.

Passive income expectations

After saving £40 per week, I’d have £2,080 by the end of the year. So, if I invested in shares that yielded 5% on average, I’d expect to receive roughly £104 in yearly income in my first year. That isn’t a tremendous sum, to be sure. However, it might be the start of a series of realistic passive income sources for me. If I keep at this, week after week, year after year I can expect to have built a reasonable portfolio by the time I retire.

James Reynolds has no position in any of the shares mentioned. 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.