1 dividend stock to buy in May

This Fool is attempting to build a healthy passive income stream. He has identified a dividend stock he likes the look of.

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One dividend stock I like the look of is Residential Secure Income REIT (LSE:RESI). Here’s why I’d add the shares to my holdings in May.

Residential real estate investment trust (REIT)

Residential Secure Income is a REIT investing in affordable, quality residential properties. As I write, its portfolio is worth over £350m and consists of over 3,000 properties.

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As a quick reminder, a REIT is a business set up to make money from income-producing property. REITs can be a great dividend stock option as they must return a good portion of profits as dividends to investors. REITs offer investors access to the property market without having to buy or manage property.

As I write, Residential Secure Income shares are trading for 109p. At this time last year, the shares were trading for 98p, which is a 14% increase over a 12-month period.

A dividend stock with risks

Residential Secure Income shares could be impacted negatively if the demand for rental properties decreases. The Bank of England (BoE) could loosen mortgage lending rules. This could encourage people to buy their own homes rather than look at renting. I do believe this is a longer-term risk, but a risk nonetheless. If people moved away from the rental market, RESI could see its bottom line suffer, also affecting investor payouts too.

Dividends can be cancelled at any time. They are at the discretion of the business and dependent on performance. There is no such thing as a guaranteed dividend.

Why I’d buy the shares

Residential Secure Income has a good track record of recent and historic performance. I do understand that past performance is not a guarantee of the future, however. Looking back I can see that revenue and profit have increased each year for the past four years.

One measure I look at for every dividend stock is the dividend yield. I can see that at current levels, RESI’s dividend yield stands at close to 3%. This is close to the FTSE 100 average despite Residential being on the FTSE All Share index.

Residential Secure Income shares look like good value for money with a price-to-earnings ratio of 16. In addition to this, the shares are currently trading on a price-to-earnings growth ratio of below one. The general consensus is that any reading below one suggests the shares are undervalued.

Finally, Residential Secure Income is operating in a thriving market with favourable conditions. It specialises in two segments, one of these being retirement rental properties. In fact, it owns the largest retirement rental portfolio in the UK. The ageing demographic and burgeoning retirement rental market mean RESI could be primed to benefit.

Overall I think Residential Secure Income REIT is the perfect dividend stock to boost my holdings and continue to build my passive income stream. I’d happily add the shares to my holdings and expect to see my returns increase over the long term.

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Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Should you invest the value of your investment may rise or fall and your Capital is at Risk. Before investing your individual circumstances should be considered, so you should consider taking independent financial advice.

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