Do real estate investment trusts (REITs) make great dividend shares?

Always on the hunt for interesting dividend shares, our writer takes a closer look at some of the UK’s real estate investment trusts (REITs).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

House models and one with REIT - standing for real estate investment trust - written on it.

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Imagine a dividend share that returns at least 90% of its profit to shareholders each year. Well, I reckon most experienced investors would probably say this isn’t sustainable and warn that the payout’s likely to be cut.

However, there’s one particular type of stock – a real estate investment trust (REIT) — that must do this to avoid having to pay corporation tax. And with this potentially lucrative privilege available, perhaps not surprisingly, there are many REITs listed on the UK stock market.

One that’s recently grabbed the headlines is Care REIT, which specialises in healthcare properties. On 10 March, its share price soared 32.5% after news of a takeover approach was revealed. CareTrust, a US-listed equivalent, sees the acquisition as a means of gaining entry to the UK market. However, even with the jump in its share price, the stock still trades at a discount to its net asset value (NAV).

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.

Undervalued or unloved?

And this appears to be a common problem with REITs.

Despite the attractive yields on offer, their stock market valuations tend not to fully reflect the value of their underlying assets. On the plus side, this could represent a buying opportunity. But it might also be a sign that sceptical investors have concerns about the prospects for the notoriously cyclical property market.

Take Tritax Big Box REIT (LSE: BBOX) as an example to consider. It invests in large distribution centres (warehouses), and boasts Amazon and Ocado among its tenants. Yet despite forecasts predicting that the global logistics market will be worth $6trn by 2030, this particular REIT trades at a 22% discount to its NAV.

But the trust has ambitious growth plans. In January, as part of its intention to expand into the AI market, it submitted a planning application to build a £365m data centre near Heathrow airport.

However, as with all REITs, it’s vulnerable to a slump in the property market caused by a wider economic slowdown. Unoccupied premises and tenants failing to pay rents on time is a potentially disastrous combination.

And although Tritax Big Box’s yield (5.4%) is above the FTSE 250 average, there are other REITs that offer a better return.

Passive income opportunities

Warehouse REIT also specialises in the logistics sector and is currently yielding 6.1%.

Based on its last four quarterly dividends, Supermarket Income REIT is presently offering a yield of 8%.

Similarly, Regional REIT is yielding 7.6%. But its share price has struggled since the pandemic. That’s because its portfolio comprises mainly offices and business parks. And with the move towards increased working from home, the demand for its properties has fallen. Rents in the sector have also come under pressure. Regional REIT’s share price fell heavily in the summer of 2024, after it announced a £110.5m rights issue to help refinance some of its debt.

With their above-average dividends, REITs can be attractive for income investors. Of course, payouts are never guaranteed. And if interest rates stay higher for longer, this could reduce earnings. That’s because these trusts generally borrow to fund property acquisitions. Higher finance costs are therefore likely to impact on the level of dividends paid.

Despite these challenges, I think investors looking for exposure to the property market could consider REITs. Their generous dividends could make them a good option for those looking for a healthy income stream.

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.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Beard has no position in any of the shares mentioned. The Motley Fool UK has recommended Amazon, Tritax Big Box REIT Plc, and Warehouse REIT 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.

More on Investing Articles

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

This 1 moment changed Warren Buffett’s investment approach forever!

Our writer has learnt a valuable lesson from billionaire Warren Buffett, who changed his preferred investing style after a lightbulb…

Read more »

Close-up image depicting a woman in her 70s taking British bank notes from her colourful leather wallet.
Investing Articles

Could this overlooked FTSE 100 stock be the next Rolls-Royce?

Rolls-Royce's market cap was similar to this FTSE 100 firm just two-and-a-half years ago. Now it’s flying high. Could Melrose…

Read more »

Young female couple boarding their plane at the airport to go on holiday.
Investing Articles

Here’s how much passive income a 21-year-old investing £60 a week could earn by 35!

A 21-year-old putting this passive income into action today could realistically target a four-figure passive income by their mid-thirties. Here's…

Read more »

Female student sitting at the steps and using laptop
Investing Articles

£10,000 invested in Greggs shares a year ago is now worth…

Our writer goes through some of the recent price history for Greggs shares and explains why he's again decided to…

Read more »

British bank notes and coins
Investing Articles

With £10 a week, here’s how to start buying shares

Christopher Ruane says it's possible to start buying shares for a tenner a week. Here are some of the moves…

Read more »

Tesla building with tesla logo and two teslas in front
Investing Articles

Tesla stock’s up 75% in a year! Time to buy?

Tesla stock has soared in the past year. Our writer considers whether he ought to invest in the business at…

Read more »

Rear view image depicting a senior man in his 70s sitting on a bench leading down to the iconic Seven Sisters cliffs on the coastline of East Sussex, UK. The man is wearing casual clothing - blue denim jeans, a red checked shirt, navy blue gilet. The man is having a rest from hiking and his hiking pole is leaning up against the bench.
Investing Articles

Want to generate a £1,600 second income each year from a £20k ISA? Here’s how to try!

Stuffing an ISA with high-quality dividend shares is one way to build up passive income streams. Our writer explores how…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

This FTSE 100 company is down 33% this year. Here’s why I’m thinking of buying

The worst 2025 performer in the FTSE 100 has been hit by some fresh crises. Is it time for investors…

Read more »