Supermarket Income REIT (LSE:SUPR) is a stock I decided to buy earlier this week, so I’m putting my money where my mouth is with this one. I think it could be a great passive income investment.
The company is a real estate investment trust (REIT) with a 7% dividend yield. I’m not expecting much in the way of growth, but at today’s prices, I don’t think it needs it.
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Specialism vs. diversification
Different REITs own different types of property. Some, such as Alternative Income REIT, own a diverse collection of buildings and others, such as Shaftesbury Capital, focus on a specific area.
The downside to being diversified is that it takes a lot to have a competitive edge in all of these categories. And focusing on a particular geography can mean limited opportunities for growth.
I like Supermarket Income REIT’s approach here. The firm focuses on retail properties, allowing for specialisation, but has a national remit that offers some scope for acquisitions.
Risks
Growth is often a challenge for REITs – distributing 90% of their income as dividends means relatively little scope to reinvest. This is particularly pressing for Supermarket Income REIT.
The rise of Aldi and Lidl have forced incumbents to make their prices more competitive. And a common strategy has been to limit lease obligations by buying buildings outright.
Investors should therefore be mindful of the possibility of tenancies not being renewed and rental income falling as a result. But I think there’s enough that offsets this risk.
Growth
Three things stand out to me. One is the way the fact that the company’s tenancy agreements have inflation-based uplifts built in, which should generate some rental growth.
A second is the time left on existing leases. With the majority of contracts having over 10 years to run, Supermarket Income REIT should get a good price from any properties tenants want to buy.
Third, the stock comes with a 7% dividend yield that is almost entirely covered by recurring rental income. As a result, I think the chances of this getting cut any time soon are very low.
7% yield
The average return from the FTSE 100 over the last 20 years has been just over 6.5% per year. And I think higher average interest rates going forward will mean these returns will be slightly lower.
A 7% dividend yield from a FTSE 250 stock that I think will be a reliable payer is therefore very attractive. That’s why I’ve been buying the stock earlier this week to add to my existing investment.
Ideally, I’d like the stock to stay where it is for the foreseeable future. If it does, I expect to be able to keep buying more shares and reinvesting my dividends at the same rate.
Passive income
At today’s prices, investing £10,000 in Supermarket Income REIT could get me 11,627 shares. And reinvesting the dividends each year at a 7% yield can have some powerful results.
Over 20 years, compounding £10,000 at 7% per year could result in a portfolio distributing £2,500 per year in dividends. I think that’s a perfectly good return.
I don’t have enough excess cash to make a £10,000 investment today. But I’ve been buying the stock for my portfolio and I intend to continue.
