By buying 7,267 shares in this FTSE 250 company, I could generate passive income of £500 per year

There are many different ways to generate passive income. My preferred method, however, is investing in dividend stocks. These reward investors with cash payouts on a regular basis.

Here, I’m going to illustrate how I could potentially generate £500 per year with Tritax Big Box (LSE: BBOX), a dividend stock that’s part of the FTSE 250 index. I already own this particular stock and I plan to keep increasing my holding over time.

A reliable dividend payer

Tritax Big Box is a real estate investment trust (REIT) that invests in large logistics warehouses and rents them out to blue-chip retailers such as Amazon, Tesco, and M&S. Its shares can currently be picked up for around £1.49 a piece.

Since paying its first dividend in 2014, Tritax has been a reliable dividend payer. One reason for this is that REITs are required to pay out the bulk of their profits to investors as dividends.

£500 in passive income

Now for 2022, Tritax is projected to pay out 6.88p per share in dividends to investors (this is just an estimate and isn’t guaranteed).

This means that to generate £500 per year from the stock, I’d need to own roughly 7,267 shares. That’s a little under £11k worth of shares at today’s share price.

Is that achievable for me? I think so. I already own 1,252 Tritax Big Box shares. So, I don’t have to start building my position from scratch. If I keep adding to my position, I think I could get to 7,267 shares within the next five to 10 years.

Higher dividends could help

It’s worth pointing out dividend growth could help me get to £500 in passive income faster.

Recently, Tritax lifted its half-year dividend by 4.7%. I expect to see further dividend increases going forward as profits rise.

If it was to keep lifting its payout in the years ahead, I would need less than 7,267 shares to generate income of £500 per year (assuming the share price stays at current levels).

This goes both ways, however. If Tritax was to cut its dividend, I would need more than 7,267 shares to generate that level of income.

Of course, another variable to consider here is the share price, which has come down recently. If it was to rise, it would cost me more to generate income of £500 (assuming the dividend payout stayed the same). If it was to fall, it would cost me less.

A diversified approach is sensible

It’s worth pointing out that like any stock, Tritax Big Box has its risks. If economic conditions continue to deteriorate, it may not be able to collect all its rent from tenants. This could put the dividend at risk, and potentially have a negative impact on the share price.

Given the risks, I’m investing my money across a number of different dividend stocks, so that I don’t have all my eggs in one basket. This should improve my chances of generating reliable passive income and help me build up my wealth.