Owning shares in profitable businesses can be a great source of passive income. And the requirement that real estate investment trusts (REITs) distribute their profits as dividends makes them especially attractive.
Rising interest rates have caused the price of shares in a number of REITs to fall, creating higher dividend yields. But after a rally after the last few months, should investors now look elsewhere?
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REITs
Rising interest rates have been a headwind for property prices in 2023. But not all real estate stocks have been affected in the same way — companies have had contrasting results across sectors and geographies.
Perhaps unsurprisingly in a year where AI emerged as a dominant investment theme, data centre REITs have fared well. Digital Realty Trust, for example, has seen its share price increase by around 30%.
On the other hand, shares in Regional REIT have fallen by around 50% as office landlords have struggled across the board. This is due to remote work continuing to weigh on demand for office space.
One of the most interesting sectors is warehouses. In the UK, shares in Warehouse REIT have fallen by over 20%, while US counterpart Prologis has seen its share price increase by 3.5%.
In short, there might be stocks to buy in the REIT sector, even after a rally towards the end of the year. But it’s worth shopping around and taking a fine-grained approach, rather than looking at the sector as a whole.
What else looks cheap?
Stabilising interest rates have been good for REITs. But they’ve been bad for consumer defensive stocks, which are less attractive when economic conditions are conducive to growth.
Unilever, for example, has seen its share price fall by around 4% over the last month. This is due to the company reaching the limit of its ability to pass through inflation without bringing down sales volumes.
As with REITs, different stocks have had quite different fortunes. Discount retailer Costco, for example, has seen its share price has increased by 5% over the last month as consumers trade down.
In some cases, specific considerations have been weighing on stocks. British American Tobacco, for example, has seen its share price fall by around 9% based on the prospect of a smoking ban in the UK.
Where share prices have been falling, dividend yields have been increasing. I think this makes the sector a good place to look, but as with REITs I’d look to be selective in terms of which stocks to buy right now.
Passive income 2024
With both REITs and consumer defensives, it looks to me like there are investment opportunities that can start providing investors with passive income next year. But in both cases, I think it’s worth being selective.
In terms of the real estate market, warehouses and industrial distribution is a sector for UK investors to consider carefully. With an e-commerce tailwind, shares in companies in this industry look attractive to me.
Within the consumer defensives space, I think the opportunities are in stocks that have fallen out of favour as interest rates stabilise. The increased dividend yields could make them attractive for 2024 and beyond.
