Stock market correction: a once-in-a-decade chance to build big passive income?
Passive income investors have been licking their lips recently as the stock market entered correction territory. How do I know?
Well, Legal & General, Primary Health Properties (LSE:PHP) and Taylor Wimpey have been three of the four most popular shares bought by AJ Bell customers over the past week. And it’s not hard to see why, because after the recent pullback sparked by the Iran conflict, this trio now yield 9.2%, 7.8% and 8.8%, respectively.
But is now really such a rare chance to build high-yield passive income?
What’s a correction?
To clarify, a stock market correction is a decline of 10% to just under 20% in the value of an index from its most recent peak (20% and over is a crash). The FTSE 100 entered one yesterday (23 March), before jumping higher after President Trump said the US was talking to Iran about ending the conflict.
However, the FTSE 250 index is still 11% lower than it ended February, so remains in correction territory. The implication is that investors are less confident that domestically focused mid-cap companies can weather the sudden inflationary spike triggered by the war.
So, is this really a good time to go rummaging around the FTSE 250 for bargains? Well, it might be if history is anything to go by.
You see, the last correction before today’s was almost a year ago when Trump dropped his tariffs bombshell. The FTSE 250 pulled back around 11.5% inside two weeks back then.
Fast forward to now, the index has returned roughly 24% since its 7 April low, including dividends. And that’s after the recent 11% haircut!
The correction before that was back in 2022. And had someone made a £10,000 investment in September of that year, when the mid-cap index bottomed out, they would now have over £15,000, including dividends.
Once-in-a-decade chance?
It may be misleading to say that corrections are once-in-a-decade chances to make huge returns. Historically, such potentially life-changing opportunities tend to be more common during full blown stock market crashes.
But corrections are still relatively rare, and therefore great opportunities to bag higher dividend yields. Returning to Primary Health Properties, is this FTSE 250 real estate investment trust (REIT) worth a look? I think so.
As a major healthcare property owner, the majority of rental income is funded directly or indirectly by a government body. And we’re talking over 1,100 properties across the UK and Ireland, including GP surgeries, medical centres and private hospitals.
Since the Iran war started, the share price has slumped almost 15%. This reflects fears that interest rates are going up, creating a risk that the REIT will have to refinance debt at less attractive rates. And that could result in disappointing dividend growth in future (or even a cut).
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However, Primary Health Properties has 30 years of dividend increases under its belt. And the dip gives us that juicy 7.8% yield, which is enough to generate £780 in annual passive income from £10,000, assuming the dividend is paid.
The prospect of higher interest rates clearly adds risk to the investment case here. But with an exceptionally high, stable occupancy rate of 99%, I feel this ultra-high-yield stock is worth considering for a dividend portfolio right now.
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Ben McPoland has positions in Legal & General Group Plc. The Motley Fool UK has recommended Aj Bell Plc and 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.
