What’s the most important thing you need to earn long-term passive income? I think the answer is consistency. 

The ability to keep investing year after year is an incredibly powerful force. And the results can be spectacular. 

£100 a month

Suppose you invest £100 a month and get a 6.5% annual return, which you reinvest at the same rate. How much do you have after five years? The answer is £7,172.93 and you’re earning £398.11 a year. You’ve invested a total of £6,100 and the rest is your return.

Fast forward to Year 10 and where are you now? The answer is £16,863.45 and your portfolio is returning £989.55 a year. Carrying this on, you get to a £2,910.99 annual return in Year 20 and £6,515.21 after 30 years. All by investing £100 a month at 6.5%.

For those of us who don’t have that to hand, £100 a month might be much more achievable. But the obvious question is how to achieve a 6.5% annual return. 

8.93% yield?

Real estate investment trusts (REITs) often have high dividend yields. In exchange for tax advantages, they return 90% of their cash to investors.

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.

Even in this context though, NewRiver REIT‘s (LSE:NRR) exceptional. The current yield is 8.93%, so the first question is what’s the catch?

The answer is debt. The firm has a £300m bond that matures in 2028 and it’s unlikely to be able to refinance that at the current 3.5% interest rate. That means higher interest costs and lower profits. So could that make the current dividend unsustainable going forward? 

Maybe. But I think it’s important to look at this risk in the wider context. 

A potential opportunity

NewRiver REIT’s management has known about its debt profile for some time. And it’s been making moves to ensure it’s ready when the time comes. As of its latest report (earlier this month) the company has around £100m in cash available. So the outstanding amount is £200m.

If NewRiver paid this down by issuing shares at the current price, the dividend yield would fall to around 5.5%. That would be bad but not disastrous.

My view however, is that it won’t come to this. The business has had some recent success with asset sales, rent increases and cost efficiencies. In fact, management’s so confident the situation is under control that it’s been using cash for share buybacks. I think that’s a very strong sign.

Risks and rewards

Investing always comes with risks. But a portfolio of dividend stocks is the best way I can think of to earn passive income with £100 a month. NewRiver REIT’s a stock that I think has a realistic chance of offering a 6.5% annual return. And that means it’s worth a look.

It isn’t however, the only name by any means. While high dividend yields can be a sign of risks, they can also be opportunities.