I’m searching for the best dividend stocks to buy this summer. And the following real estate investment trusts (REITs) have caught my eye with their FTSE 100-beating dividend yields.
Here’s why I’ll be looking to buy them when I have spare cash to invest.
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The PRS REIT
Rents in the UK are soaring as the homes supply worsens. Tenant costs have risen by double-digit percentages for 15 straight months, according to Zoopla. A steady decline in buy-to-let investors, coupled with falling housebuilding activity means that this shortfall looks set to continue.
Excluding the pandemic, residential property construction slumped at its sharpest rate in more than 10 years in June, latest PMI data showed. Weak homebuyer demand means that build rates could weaken still further in the months ahead.
PRS REIT is building its own property portfolio to capitalise on this landscape. It will have 5,600 homes on its books once its current delivery programme finishes, up from around 5,000 today. Encouragingly the company is focused on the family home segment of the rental market. Rent rises are especially high in this part of the sector.
Under REIT rules the FTSE 250 business must pay at least 90% of annual rental profits out in dividends. This explains why it offers that market-beating dividend yield.
The property stock also offers solid value in terms of earnings. I think a price-to-earnings (P/E) ratio of 18.5 times is quite attractive, even when one factors in the pressure created by rising build costs.
Dividends at student accommodation provider Unite Group (LSE:UTG) have risen strongly in recent years. It’s a trend analysts expect to continue, resulting in a healthy 4% dividend yield for the current 12-month period.
Okay, changes to government policy on higher education funding could damage earnings here. Yet the profits outlook remains hugely encouraging right now. Student numbers are tipped to soar over the next decade, driven by a rising number of people from overseas. So accommodation demand is tipped to outstrip supply, pushing rents steadily higher.
Market dynamics are already favourable for Unite. Latest financials in April showed that 90% of its rooms are already booked for the 2023/24 financial year. It also expects to enjoy rent growth of between 6% and 7% year on year.
As a consequence City brokers expect earnings at the FTSE 100 firm to rise by low-single-digit percentages over the next few years, leading to steady dividend growth over the period.
Recent price falls leave Unite shares trading on a forward P/E ratio of 19.1 times. I think this represents decent value given the company’s excellent defensive qualities. Studies show that university enrolment actually ticks higher during recessions.