What do losing weight, writing a doctoral thesis, and earning passive income have in common? Answer: you can’t really rush them.
More accurately: you can rush them, but it’s a really bad idea. And I should know – I’ve done all three.
Some things take time
Some things in life just take time. If you’re trying to lose 10% of your body weight, it’s probably not advisable to try and do it all in a day.
Likewise, you can try to write a PhD thesis in a week if you really want to. The trouble is it’s likely to be a lot worse than if you take more time.
It’s always natural to look for ways to do things more efficiently. But some things just don’t work as well if you try to do them quickly.
Earning passive income is one of these. There are stocks with huge dividend yields that offer big returns in a hurry.
The trouble is, taking the approach of piling into these is often a risky business. And doing so can be detrimental to your wealth.
18.2% dividend yield?!
As an example, consider B&M European Value Retail (LSE:BME). Right now, the stock comes with a massive 18.2% dividend yield.
That’s enough to turn £20,000 into £3,640 a year in passive income straight away. But investors do need to look a bit more closely.
One thing to note is that the dividend per share has fallen by 32% since 2022. That’s a sign things are moving in the wrong direction.
| Year | Dividend per share |
|---|---|
| 2022 | 41.5p |
| 2023 | 34.7p |
| 2024 | 34.9p |
| 2025 | 28.2p |
On top of this, the firm’s free cash flows are barely covering its dividend. And that’s not including what it spends on lease payments.
That’s not to say B&M is a terrible business. It maintains some pretty impressive operating margins for a retailer.
It is, however, to say that investors need to look at more than that 18.2% dividend yield. And they should certainly think about how sustainable it is.
A better option?
By contrast, I think Tesco (LSE:TSCO) is a stock that is worth considering. The underlying business looks like it’s in much better shape.
Compared with B&M, Tesco has much narrower operating margins. And that creates a risk of inflation cutting into profits.
The firm, however, has some huge advantages that keep it moving forward. The most obvious is its massive scale.
Tesco uses this to negotiate lower prices with suppliers. And it uses its lower costs to offer better value to consumers.
Complicated it isn’t. But it’s an incredibly effective strategy in an industry where retaining customers is very difficult.
The dividend yield is currently 3.5%. That’s a lot lower than 18.2%, but it looks like a much more durable passive income opportunity to me.
Don’t rush
Some things in life just take time. And earning passive income is one of them.
With £20,000, investors can find stocks offering an 18.2% dividend yield. But that doesn’t mean they should buy them.
The way to target £3,640 a year in passive income is to find long-term opportunities and let them grow. Over time, that’s likely to work better.
