The FTSE 250 is awash with real estate investment trusts (REITs), a popular choice among investors looking for stable dividend income.
REITs are similar to property investment trusts in that they provide exposure to the housing market. For investors lacking the funds to buy property directly, they’re an easily accessible alternative.
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Compounding via dividends
While there are many different ways to build a portfolio aimed at income investing, dividends usually play a role. By reinvesting dividends regularly, growth can be achieved by compounding returns.
REIT dividends tend to be consistent and reliable because the trusts are required to return 90% of profits to shareholders. For UK investors looking to earn passive income, that makes them an obvious choice.
To qualify, the shares must be bought before the ex-dividend date. However, dividends can be cut at any time before this date, so future payments are never guaranteed.
How much passive income can I earn from REITs?
While it’s impossible to say exactly how much passive income can be earned, aiming for a high dividend yield is a good start. This is the amount of the investment that is paid as dividends.
I generally aim to maintain an average yield of around 6%. A rising yield could be offset by a falling price so it’s important to pick well-established REITs with low price volatility.
Two of my favourites are Primary Health Properties (LSE: PHP) and PRS REIT (LSE: PRSR), with 7.5% and 3.5% yields, respectively. They offer exposure to different sides of the market, helping me achieve a balance of yield and price growth.
Primary Health
Primary Health was my first REIT and it’s served me well. It has an attractive 7.5% yield and has been increasing dividends for over 20 years at a rate of 3.2% on average.
As the name suggests, it primarily focuses on managing and developing healthcare facilities such as GP surgeries, medical centres, and clinics. But years of high interest rates have stifled investment, dampening UK property stocks.
The expectation of increased NHS investment under the new Labour government gave it a boost in July. But the October budget put a damper on things, with stifling tax hikes hurting the property market.
It’s now down 45% from a high of £1.67 in August 2021. A similar drop occurred in 2007, with a 127% recovery in the following decade. No guarantee it’ll happen, but I plan to buy more of the shares in anticipation.
PRS REIT
A relative newcomer, PRS REIT has only been paying dividends for seven years. They’ve remained steady at 4p per share after being cut from 5p in 2020. Unlike Primary Health, the trust has enjoyed solid growth, up 31% this year but with only a 3.75% yield.
PRS stands for Private Rented Sector, indicating the focus on family homes for rent. The sector enjoyed renewed growth this decade as more people look to rent rather than buy.
However, if interest rates start rising again it could hurt the REIT’s performance. Since it uses debt to finance new acquisitions, higher borrowing costs would push up expenses. And if the economy slumps again, it could reduce tenants’ ability to pay rent.
But with a price-to-earnings (P/E) ratio of 6.2, it currently looks like good value. If the economy holds strong in the new year, I plan to buy more of the shares.
This post was originally published on Motley Fool
