I already own a few small-cap stocks as part of my holdings, but one more penny share I’m considering buying is Residential Secure Income (LSE: RESI). Here’s why.
Residential housing investment
Residential Secure Income is set up as a real estate investment trust (REIT). It develops or buys social housing assets in the UK and rents them out.
It is worth remembering that REITs are essentially property stocks and they must payout at least 90% of rent profits in the form of dividends. Most REITs are looking for long-term rental agreements that provide stable income and consistent shareholder dividends.
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A penny share is one that trades for less than £1. As I write, Residential shares are trading for 60p. At this time last year, they were trading for 110p, which equates to a 45% drop over a 12-month period. Soaring inflation and rising interest rates have caused many UK shares to fall in recent months.
The bull and bear case
I believe Residential is operating in a burgeoning market. Demand for social housing is nearing all-time highs. In fact, demand is far outstripping supply at present. Over 1m households in the UK are waiting for social homes, according to the charity Shelter.
Residential could capitalise here and build or invest in quality homes, and rent them out for long-term contracts and see stable earnings come in. This could boost dividends.
Speaking of passive income, Residential currently has an enticing dividend yield of 8.5%. This is very high for a penny share. In addition to this, I can see Residential has increased profits for the past four years in a row. However, I am aware that dividends are never guaranteed and past performance is not an indicator of the future.
Moving onto the bear case, soaring inflation has impacted construction materials and costs. This is bad news for Residential as it could find that rising costs take a bite out of profit margins, which underpin shareholder returns.
Next, the current cost-of-living crisis has meant that many consumers are finding it harder to pay essential bills, including rent. Residential could see some tenants experiencing difficulty paying rent. This could hinder its performance and payout levels. This is a major risk for nearly all REITs, when rent collection for a number of reasons could fall.
A penny share I’m buying
After reviewing the pros and cons, I’ve decided to buy some Residential Secure Income shares for my holdings imminently.
I believe Residential’s risks are shorter-term issues that could resolve themselves as the economy strengthens over time. I’m more buoyed by the surging demand for residential housing levels as well as the enticing passive income opportunity on offer. Residential will be yet another REIT I hold shares in soon.
