These are my top FTSE 250 REITs for earning passive income from dividends

The 90% profit distribution rule applied to REITs makes them an attractive option for dividend investors. Here are two of my favourites on the FTSE 250.

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The FTSE 250 is awash with real estate investment trusts (REITs), a popular choice among investors looking for stable dividend income.

REITs are similar to property investment trusts in that they provide exposure to the housing market. For investors lacking the funds to buy property directly, they’re an easily accessible alternative.

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Compounding via dividends

While there are many different ways to build a portfolio aimed at income investing, dividends usually play a role. By reinvesting dividends regularly, growth can be achieved by compounding returns.

REIT dividends tend to be consistent and reliable because the trusts are required to return 90% of profits to shareholders. For UK investors looking to earn passive income, that makes them an obvious choice.

To qualify, the shares must be bought before the ex-dividend date. However, dividends can be cut at any time before this date, so future payments are never guaranteed. 

How much passive income can I earn from REITs?

While it’s impossible to say exactly how much passive income can be earned, aiming for a high dividend yield is a good start. This is the amount of the investment that is paid as dividends.

I generally aim to maintain an average yield of around 6%. A rising yield could be offset by a falling price so it’s important to pick well-established REITs with low price volatility.

Two of my favourites are Primary Health Properties (LSE: PHP) and PRS REIT (LSE: PRSR), with 7.5% and 3.5% yields, respectively. They offer exposure to different sides of the market, helping me achieve a balance of yield and price growth. 

Primary Health

Primary Health was my first REIT and it’s served me well. It has an attractive 7.5% yield and has been increasing dividends for over 20 years at a rate of 3.2% on average.

Created with Highcharts 11.4.3Primary Health Properties Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

As the name suggests, it primarily focuses on managing and developing healthcare facilities such as GP surgeries, medical centres, and clinics. But years of high interest rates have stifled investment, dampening UK property stocks.

The expectation of increased NHS investment under the new Labour government gave it a boost in July. But the October budget put a damper on things, with stifling tax hikes hurting the property market.

It’s now down 45% from a high of £1.67 in August 2021. A similar drop occurred in 2007, with a 127% recovery in the following decade. No guarantee it’ll happen, but I plan to buy more of the shares in anticipation.

PRS REIT

A relative newcomer, PRS REIT has only been paying dividends for seven years. They’ve remained steady at 4p per share after being cut from 5p in 2020. Unlike Primary Health, the trust has enjoyed solid growth, up 31% this year but with only a 3.75% yield.

Created with Highcharts 11.4.3Prs REIT Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

PRS stands for Private Rented Sector, indicating the focus on family homes for rent. The sector enjoyed renewed growth this decade as more people look to rent rather than buy. 

However, if interest rates start rising again it could hurt the REIT’s performance. Since it uses debt to finance new acquisitions, higher borrowing costs would push up expenses. And if the economy slumps again, it could reduce tenants’ ability to pay rent.

But with a price-to-earnings (P/E) ratio of 6.2, it currently looks like good value. If the economy holds strong in the new year, I plan to buy more of the shares.

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Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Mark Hartley has positions in Primary Health Properties Plc and Prs REIT Plc. The Motley Fool UK has recommended Primary Health Properties Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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