Real estate investment trusts (REITs) can be a great way to build a large and growing passive income in a Stocks and Shares ISA.
These property stocks are designed to provide investors with dividends. In exchange for corporate tax savings, they must distribute a minimum of 90% of annual rental profits in the form of cash rewards.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
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Big benefits
This on its own doesn’t make them reliable or generous dividend providers. Like any UK share, the level of shareholder payouts is highly sensitive to profitability.
But REITs have qualities that can make them better dividend deliverers than most other stocks. Rents are contracted, and tenants are commonly tied down on long tenancy agreements. Rental agreements are also typically linked to inflation, which can help these firms navigate rising costs.
Finally, many REITs operate in defensive sectors (like healthcare and food retail). Some also operate across a variety of industries, providing them with stable profits across the economic cycle.
Home comforts
I already own several REITs in my own portfolio. And I’m building a list of others to buy to boost my passive income in the New Year.
Grainger (LSE:GRI), the UK’s largest listed residential landlord, is one such trust I’m considering.
While slowing more recently, private rents continue rising at a strong pace. Newly-let properties are now on average £270 more expensive than they were at the end of the pandemic, Zoopla research shows.
With Britain’s population rapidly growing and buy-to-let investors selling up en masse, the outlook for built-to-rent companies like Grainger looks rock solid. That’s even though build cost inflation remains a threat to profits growth.
On the downside, a 3.6% forward yield isn’t the largest among UK REITs. However, its ultra-defensive qualities — rental income remains stable at all points of the economic cycle — and its growing market position still make it an attractive stock to consider buying.
It’s development pipeline was 4,730 new homes as of September.
Opportunity
Supermarket Income REIT (LSE:SUPR) is another top REIT on my radar today.
Like Grainger, it has a major structural opportunity to exploit as Britain’s population sharply increases. More people mean more mouths to feed, and with that a need for more grocery stores.
And like the residential landlord, it has exceptional defensive qualities.
For one, its operate in a broadly non-cyclical industry. It lets out its properties to a range of major blue-chip supermarkets including Tesco, Sainsbury, Waitrose, and Lidl, providing diversification across the industry’s premium, middle ground, and discount subsectors.
As an investor, I’m also encouraged by plans to boost profits by expanding internationally. In April it acquired a portfolio of 17 Carrefour stores, marking its first foray into the French marketplace.
Expansion via acquisitions like this expose investors to extra risk. But all things considered, I think the REIT — which carries a large 8.8% forward dividend yield — is an impressive passive income stock.
In my view, investors looking for passive income should consider Supermarket Income and Grainger for their own portfolios.
