Real estate investment trusts (REITs) can be great ways to generate passive income. And I’ve bought these property shares to boost my dividend income.
This is because REITs are required to pay 90% of annual profits out via dividends. I have also bought them as a way to protect myself from soaring inflation.
Here are two I think could deliver exceptional long-term passive income.
Target Healthcare REIT (LSE: THRL) will have a critical role to play as Britain’s population rapidly ages and life expectancies increase. In fact, this is a dividend stock I’ve recently added to my own portfolio.
Target operates a portfolio of around 100 purpose-built care homes. And it is expanding rapidly to meet growing demand for its services. The government estimates the number of over-85s in Britain — the primary users of care homes — will double between now and 2040.
I like this real estate stock because profits are driven by demographics rather than economic conditions. What’s more, because it specialises in residential property, rent collection can be more robust than companies operating in other sectors. This gives earnings forecasts an extra layer of security.
Although Target’s profit growth could disappoint if staff shortages in the care home sector persist, I think this threat is baked into the company’s low share valuation. Today, the business trades on a price-to-earnings growth (PEG) ratio of 0.5. Any reading below 1 suggests that a stock could be undervalued.
And this, combined with the REIT’s 6.4% dividend yield, I think makes it a brilliant value stock to buy today.
Another top REIT
I also think getting exposure to the student accommodation market is a good investing strategy. Like the care home sector, this property segment is plagued by a worsening supply and demand balance.
Unite Group (LSE: UTG) is a REIT I’m considering buying to capitalise on this opportunity. Its forward dividend yield sits at a more modest 3.1%. But it’s excellent history of dividend growth still makes it a top income buy, in my book.
To recap, Unite grew annual dividends an impressive 159% between 2014 and 2018. The business cut dividends on the outbreak of Covid-19, but shareholder payouts are rising again and predicted to continue soaring.
City brokers think 2021’s full-year reward of 21.1p per share will surge to 32.9p and 36.6p in 2022 and 2023 respectively.
UK universities have for centuries been a magnet for foreign students. And the number of overseas visitors is expected to pick up strongly. Student applications service UCAS reckons the number of international undergraduate applicants will reach 208,500 by 2026, up almost 50% from last year’s levels. This should, in turn, drive demand for more accommodation.
However, profits at Unite Group could suffer if property construction costs continue to rise. But I think the REIT should still deliver healthy bottom-line growth as a supply shortage keeps rents moving higher. This is a passive income stock which, like Target Healthcare, I’d happily buy to hold for the next decade.