Every day, I venture out and get a coffee. I do make coffee at home in the morning, but a second gets me out of the house and go for a walk. I estimate it costs me £120 a month, which got me thinking. Could I (or anyone else for that matter), build a passive income stream in UK shares to cover this cost over time? The answer’s yes.

Getting the basics right

There are a few ways someone could make this strategy work. My preferred way is using dividend shares. In theory, someone could simply buy a stock with a generous dividend yield. If enough money was put into the stock, it could generate more than required to tick the box. However, there are some problems with this.

Firstly, dividends are usually paid two or four times a year so this wouldn’t provide an investor with monthly income. Second, someone might not have a large lump sum of money simply lying around waiting to be deployed. Finally, holding just one stock involves significant risk. If the company cuts the dividend in the future, there’s a big problem.

Instead, someone could invest each month into different stocks to build a diversified portfolio over time. For example, allocating £350 a month to a portfolio yielding 7%, means the goal of having £120 a month could be reached by year five. Until now, dividends have been reinvested to accelerate the process. But from year five onwards, the investor can decide what action to take.

Of course, there’s the risk that the £350 can’t be invested each month, or that the average yield changes. This could mean it takes longer to reach the goal, but I still believe it’s a very realistic target to hit.

A target yield company

Beyond the numbers, it’s important to pick stocks that work for this strategy. One that I think could work is the Custodian Property Income REIT (LSE:CREI). The share price is up 9% in the past year, with a dividend yield of 7.15%.

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It owns a diversified portfolio of commercial properties and earns rental income from tenants on long leases. The latest quarterly trading update from February showed rental growth and leasing activity remained strong despite wider economic uncertainty. Further, it noted the business “now has around 14% of additional income growth already embedded when compared to current rents“.

As far as income sustainability goes, I think the evidence suggests it’s fine. Crucially, the company has repeatedly highlighted that its dividend is fully covered by EPRA earnings, which is a performance metric for real estate investment trusts (REITs) that measure recurring operational profitability. In other words, the trust is earning enough from its property operations to fund shareholder payouts rather than relying on borrowing or asset sales.

A risk I do note is if interest rates rise this year due to higher inflation. If borrowing costs stay elevated for longer than expected, property valuations could come under renewed pressure.

Overall, I think the REIT could be considered as part of the passive income goal.