The London stock market’s a great place to go shopping for a passive income. It’s packed with mature companies with strong balance sheets, giving investors the chance to grab high yields and the possibility of a growing dividend over time.
Here are two top dividend stocks I’ll look at buying when I next have cash to invest. Each one’s forward dividend yield comfortably beats the FTSE 100 average of 3.7%.
Home comforts
Inflation is tipped to rise again in the coming months following recent steady falls. This poses a threat to property stocks like The PRS REIT (LSE:PRSR) as, to keep price rises under control, the Bank of England may opt to put back interest rate cuts.
This could have big repercussions for companies such as real estate investment trusts (REITs). Higher property stocks are a negative for net asset values (NAVs) and, by extension, for company profits.
Yet I still believe residential landlords like PRS have significant investment potential. This is because a mass property shortage means rents in the UK continue to shoot higher.
Outside London, average rents soared 7% year on year in June to £1,316 a month, according to Rightmove. This is higher than 4% in the capital, and is good news for PRS whose entire portfolio is located outside London.
Both major political parties have vowed to soothe this homes shortage for both buyers and renters. The Labour Party, which looks on course to win a majority in today’s general election, has vowed to build 300,000 new homes between now and 2029.
But significant execution risks and a growing population mean the likes of PRS could still continue to enjoy strong rental growth for the next several years, at least. I’m certainly backing it to keep paying large dividends for the foreseeable future.
In fact, City analysts expect the firm to start raising annual dividends again this year for the first time since the pandemic. And so PRS shares currently carry a meaty forward yield of 5.4%.
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Another top REIT
Warehouse REIT‘s (LSE:WHR) another dividend share I’m tempted to buy for my portfolio.
It might not have the defensive qualities of The PRS REIT. Rent collection in the warehouse and logistics sector is (in theory at least) less dependable than with residential property. This is especially so during economic downturns.
But it’s still committed, under REIT rules, to pay almost all of its annual rental earnings out in the form of dividends. This can still make it a strong choice for a regular income stream. And today, it carries a larger forward dividend yield than PRS, at 7.7%.
Businesses like Warehouse REIT also have significant long-term investment potential, in my view. The market it operates in also suffers from a substantial supply shortfall that’s driving rents higher.
Indeed, like-for-like rents here rose 5.1% during the 12 months to March, latest financials showed.
The shortage looks set to endure too, due to a weak supply demand pipeline, rising property demand for e-commerce purposes and supply chain optimisation. I expect Warehouse REIT to deliver big dividends for years to come.
