When it comes to generating passive income, real estate investment trusts (REITs) are a fantastic tool. Why? Because these businesses pay out the bulk of their profits in dividends. And while that can result in heavy reliance on debt, those with sturdy cash flows can more than afford this expense while still maintaining and expanding shareholder payouts.
At the start of 2025, my income portfolio had three pure-play REITs. But with Warehouse REIT recently acquired and taken private, I now have two:
- LondonMetric Property (LSE:LMP) – a diversified commercial property landlord targeting the logistics, retail, healthcare, and entertainment sectors with a 6.4% yield
- Greencoat UK Wind (LSE:UKW) – one of the largest owners of onshore and offshore wind farms in the UK, with a yield of 9.3%
The question is, should other investors consider adding these income stocks to their own portfolios?
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Inspecting the dividend
Both businesses have proven to be a lucrative source of passive income. In fact, LondonMetric has successfully raised its dividend for 10 years in a row by an average of 5.7% a year. Greencoat was on a similar hiking streak until 2024, when dividends remained flat. Nevertheless, the growth’s been similar at 5.1%.
What’s behind this success? Cash flow.
Regardless of economic conditions, the asset portfolio of both REITs is highly resilient. That’s because LondonMetric only deals with large enterprises like Amazon and Tesco under lease agreements that span an average of 17 years. As for Greencoat, electricity doesn’t go out of fashion during a recession.
This translates into a continuous stream of cash flow throughout the year, allowing both companies to keep debt under control and reward shareholders.
What to watch
As much as I admire these businesses, it’s essential to recognise the risk. As previously mentioned, REITs carry a lot of debt, and neither LondonMetric nor Greencoat are an exception.
In the past, this wasn’t much of an issue since interest rates were near zero. In 2025, that’s obviously no longer the case. And it’s subsequently put more pressure on cash flows while also dragging down the value of their asset portfolios.
This interest risk is why both stocks trade at a discount and offer such a high yield today. The management teams can obviously sell underperforming properties to reduce leverage. But with depressed asset prices, this could actually destroy long-term shareholder value.
It’s a bit like an investor being forced to sell shares in a terrific business at a terrible price during a stock market crash. And unfortunately for Greencoat, this has already started happening.
Wind speeds around the UK have been weak in the last two years, resulting in lower energy generation. That’s why its dividend hiking spree was temporarily paused, pushing the yield higher as investors grew more nervous.
Still worth considering?
Out of the two REITs, I think LondonMetric’s definitely the lower-risk option right now. Nevertheless, I still remain optimistic about both income stocks, even with Greencoat encountering a few bumps lately.
Investing in debt-heavy businesses is a higher-risk endeavour right now. But with strong long-term cash generation potential combined with exceptional yields, these stocks are worth the risk, in my opinion. That’s why income investors may want to dig a little deeper.
