Just because a stock pays a dividend doesn’t make it an excellent long-term option for passive income. Many other factors are involved, including the dividend yield and the commitment from the management team to pay out sustainable income going forward.
So real-estate investment trusts (REITs) can be attractive from this angle. Here are two for investors to consider.
Improving sentiment
First up is the Regional REIT (LSE:RGL). The trust is focused on owning and leasing out income-producing commercial property. This is predominantly regional UK offices located outside London’s M25. Its portfolio is broadly diversified, spanning offices including industrial and select retail. Ultimately, over 90% of its valuation is tied to regional offices, hence the company name.
Over the past year the stock’s down 7%, with a current dividend yield of 7.35%. The yield’s high because the primary way it makes money is earning income from long-term leases across a diversified tenant base. To maintain its favourable REIT status, it must distribute a high percentage of its earnings as dividends to shareholders. Therefore, I think the outlook for further income payments is positive.
One reason the stock’s been down over the past year is the weaker sentiment around offices. The latest full-year report spoke of “another challenging year for both the property market and the regional office sector in particular”. Many are indeed still working from home and this remains a risk in the future. However, I’m starting to see the tide changing here, with more companies demanding employees return to the office, albeit not on a five-day-week basis quite yet, if at all.
As a result, I believe the Regional REIT could experience increased demand for its portfolio properties in the coming year as the trend begins to shift.
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An ESG favourite
Another option is the Social Housing REIT (LSE:SOHO). By contrast, this trust focuses on providing Specialised Supported Housing (SSH) across the UK. Its properties are leased to approved providers (typically housing associations), who receive government support or housing benefit.
An advantage here for business operations is that revenue is indirectly linked to the government, which I see as a good thing when it comes to the certainty of payment. Further, it has an inflation-linked rent and lease structure. This means a significant portion of rents adjust annually in line with CPI or housing benefit policy, helping preserve income in inflationary conditions. Given that UK inflation’s moving higher again, this is positive going forward.
It’s also a company that’s high up on the ESG scale. Annual social impact reporting shows that every £1 invested generates £2.19 in social value. This ESG strength supports steady asset performance and stakeholder confidence.
One risk is the fact that interest rates might need to stay higher for longer. This means that new debt or refinanced debt could be more expensive than previously planned, increasing overall costs.
Further, it’s still a company that needs to attract investors. It has a dividend yield of 8.03% and the share price is up 10% in the past year, so it ticks these boxes.
I think both REITs are attractive for income, and are worth considering for investors with this objective.
