I want my holdings to make me a passive income, so I am on the lookout for dividend stocks. One pick that can help me do that is PRS The REIT (LSE:PRSR).
Passive income seekers heaven
Investors often look at buy to let opportunities to access the property market. A real estate investment trust (REIT) is a company that owns and operates income-producing real estate. One of the main rules a REIT must follow is that 90% of its tax-exempt property income profit must be distributed to investors as dividends.
PRS is the UK’s first quoted REIT to focus on newly built family homes for the private rental market. It aims to enhance the rental experience for consumers and provide them with new, quality homes. As I write, PRS shares are trading for 106p, whereas a year ago shares were trading for 75p. This is a 41% return over a 12-month period.
Why I like PRS
I like PRS first because the current housing and house building market is booming. The demand for new houses is outstripping supply and housebuilders are working as hard as possible to build them. Buyers are on the lookout for new homes to buy and live in, but due to rising costs, most turn to renting. PRS can benefit from both of these favourable market conditions. It builds its own houses and then manages renting them to consumers.
I like the idea of building up a buy to let portfolio as an investment vehicle but this can be costly and time consuming. A REIT like PRS can help me make a passive income without thousands of pounds of outlay and time spent managing tenants and properties. In addition to this, buying a REIT means I avoid double taxation compared to a regular dividend stock. Other firms are liable for corporation tax and my dividend received would be taxable too. If I had a buy to let, my rental income would be liable for tax as well. REITs receive a corporate tax exemption for rental income. This means the net rental income can pass through to me, the investor, as a dividend.
Finally, PRS continues its upward growth trajectory. This was signified by an announcement confirming the purchase of a new site for a new project today. Furthermore, PRS looks cheap at current levels. It has a price-to-earnings ratio of just over 11 and a dividend yield close to 5%.
Risks involved
Current macroeconomic pressures such as rising inflation and rising costs of materials will impact house builders. A REIT like PRS could be affected as it builds its own properties. These costs, if not passed to the customers, could affect performance and any passive income I am looking to make. Also, the shares are trading close to all-time highs, meaning any negative news could knock investor sentiment and pose a risk to returns.
Overall, I believe PRS is an excellent opportunity for me to access the property market, and let somebody else manage the hassle of the properties involved. At current levels, it is cheap and has an enticing dividend yield. I would add the shares to my holdings now to make a passive income.
