To build a second income stream, dividend-paying stocks like real estate investment trusts (REITs) can go a long way. This is because they must return 90% of profits to shareholders.
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As property businesses yield income from their assets, there are a multitude of stocks like this across varying sectors.
Two I’m looking to snap up next month if I have the cash are Greencoat UK Wind (LSE: UKW) and The PRS REIT (LSE: PRSR).
Here’s why!
Renewable energy
Greencoat owns and operates offshore and onshore wind farms to provide renewable energy to over 2m homes across the UK.
The business already has excellent relationships with major energy players including SSE and Centrica.
From a returns perspective, the shares offer a juicy dividend yield of over 7%. Plus, it looks well-covered by a healthy balance sheet and a good track record of growing payouts. However, I do understand dividends aren’t guaranteed. Plus, past performance is not an indicator of the future.
From a bearish view, growth could be tricky, as land for wind farms is harder to procure and build on, due to regulations. Plus, in a higher interest environment, costs to borrow to fund growth could potentially hurt the firm’s financial health.
Overall, the rise in renewable energy initiatives, an enticing level of return, as well as defensive traits linked to energy being a basic need for all, help my investment case.
Private rental homes
The PRS REIT provides homes for the private rental sector. This could be a lucrative market for years to come for three key reasons, and good news for PRS.
Firstly, the housing imbalance in the UK could help boost performance and returns. Plus, with recent volatility, buying homes is harder than ever, so people are turning towards the rental sector. Finally, as the UK population continues to grow, demand for homes should remain robust.
A dividend yield of just over 5% is also attractive. In addition to this, the shares look cheap on a price-to-earnings growth (PEG) ratio of just 0.7. Any reading below one can indicate value for money.
Despite my bullish stance, there are risks involved too. To start with, as the cost-of-living crisis rumbles on, consumers are struggling with higher costs, and this could impact their ability to pay their rent. This could hurt PRS’s performance and return levels. Furthermore, similarly to Greencoat, borrowing to fund growth and new homes could be costlier, and trickier due to the current economic malaise.
For me, however, the pros outweigh the cons by some distance. The huge housing imbalance in the UK, coupled with a burgeoning rental sector, and PRS’s wide geographical coverage in the UK, fill me with belief that this could be a great stock to buy for my portfolio.
