I think the UK has some terrific passive income opportunities for investors to consider. And a number of them are in the property sector, specifically real estate investment trusts (REITs).
Low valuations and high dividend yields have put UK REITs on the radars of some big names in private equity. But there are still some names that are well worth a look at the moment.
REITs
REITs are companies that own and lease properties to tenants. Different ones focus on different assets, from data centres to theme parks and pretty much everything in between.
For investors looking for passive income, REITs have a big attraction over other dividend stocks. While other firms can choose to cut their dividend if they want to, REITs can’t. They’re required to pay out 90% of their taxable income to investors as dividends. So the only way their dividends go down is if their rental income drops.
Not being able to choose what to do with their cash can be a challenge. But in terms of income, REITs can’t do what Diageo has just done and decide to retain cash instead of distributing it.
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. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
A steady 7%
Primary Health Properties (LSE:PHP) is one example. The stock comes with a 7% dividend yield, which means a £20,000 investment in a Stocks and Shares ISA is set to return £1,424 a year.
The firm has a lot of what REIT investors often look for. It has high occupancy rates, strong rent collection metrics, and long-term leases (they have almost 10 years to expire, on average).
Investors should note though, that the average debt maturity is around five years. This creates a risk of having to refinance at higher rates without being able to increase rents to compensate.
Primary Health Properties though, has a strong record of managing this kind of challenge. It’s increased its dividend for 30 consecutive years, so it’s seen bigger issues before and kept going.
Higher risk, higher reward?
By contrast, shares in Regional REIT (LSE:RGL) come with a 10.13% dividend yield – enough to turn £20,000 in a Stocks and Shares ISA into something generating £2,026 a year.
However, that big dividend comes with some more obvious risks. The firm’s portfolio of regional office buildings has much lower occupancy ratios, and the average lease is significantly shorter.
Regional REIT though, has a bolder growth plan than Primary Health Properties. It aims to sell off some of its weaker assets, upgrade others, and emerge in a much stronger position.
It’s an ambitious plan and isn’t guaranteed to work. But a 10% dividend yield means the potential rewards on offer for passive income investors willing to take the risk could be huge.
Income opportunities
For investors looking for dividend stocks, I think the UK’s REIT sector is terrific. And for those that can, a Stocks and Shares ISA is a great way to avoid having to pay dividend taxes.
Those looking for a steady company that fits the traditional profile might like Primary Health Properties. And Regional REIT offers something less conventional, but much more dynamic.
At today’s prices, I think either’s worth considering. So passive income investors can make their own minds up which they prefer.
