Investing in real estate investment trusts (REITs) can be a great way of earning passive income. And there are some unusually good yields on offer at the moment.
In some cases, these are around the 9% mark. At that level, I think investors looking to give their monthly income a boost should look seriously at the REIT sector in the UK right now.
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What do REITs do?
In general, REITs own and lease properties to tenants. They don’t pay tax on their profits, but they have to distribute 90% of their income to shareholders through dividends.
The shareholders themselves don’t do anything – the income they get is genuinely passive. And while dividends are never guaranteed, REITs are often more reliable than other businesses.
In some cases, the company’s name makes it obvious what type of properties it owns. Primary Health Properties and Warehouse REIT are two examples. Other times, companies own a more diversified group of assets. Alternative Income REIT, for example, owns everything from power stations to nurseries.
REITs offer investors a chance to earn income by renting out properties without all the work of finding and managing them. But there are a few things worth noting.
Investing in REITs
There are a several downsides to investing in REITs. The first is they have limited scope for growth – being required to distribute their rental income means they can’t reinvest it in more properties.
As a result, real estate investment trusts typically have to take on debt to expand their portfolios. And this can leave them in a difficult situation if their tenants default or they have vacant periods.
There’s not much investors can do about this. So they need to make sure they get a good enough return from the dividends they receive to compensate for the risk they take on.
Right now, dividend yields are unusually high. And with a 6% yield, there’s one in particular that stands out to me from an investment perspective.
LondonMetric Property
The stock is LondonMetric Property (LSE:LMP). The majority of the company’s portfolio is made up of industrial distribution centres and its other assets are grocery stores.
At 6%, the dividend yield’s the highest it’s been in a decade. This can be a sign investors are concerned about the company’s ability to sustain it over time, but I don’t see this as the case here.
That’s not to say the stock’s risk-free. JP Morgan recently downgraded the stock to Neutral from Overweight, citing the danger of higher costs of debt.
This is something to take seriously. But investors should also note that LondonMetric’s selling off non-core assets and the proceeds from these could be used to offset this risk.
A once-in-a-decade opportunity?
It’s not just LondonMetric Property that looks unusually attractive. Segro (4%), Land Securities (7%), and Unite Group (4.5%) all have dividend yields that haven’t been seen in the last decade.
Each brings its own risks and rewards. But in each case, now looks like the time to consider buying – I don’t think the passive income equation has been this attractive in the last 10 years.
