The UK has a lot of opportunities for passive income investors. But my favourites are real estate investment trusts (REITs).
These are firms that lease properties to tenants and distribute the cash to shareholders. And the returns can be very attractive due to tax advantages they have.
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.
Earning income
Some REITs come with very high dividend yields. But while this can be a warning sign, a few are worth a closer look.
A 7.5% annual return is better than a savings account. And investing at that rate can bring big results over time. In Year One, a £10,000 investment earns £750. But reinvesting the dividends at the same rate means more income next year.
At the same rate, the return in Year Two reaches £806. And by Year 10, it reaches £1,437 – more than twice the Year One return. After 30 years, this process returns £6,108 in dividends. That’s income that investors don’t have to do any work for.
The big question is how to find 7.5% opportunities. Fortunately, the UK is an unusually good place to look.
Primary Health Properties
Primary Health Properties (LSE:PHP) owns GP surgeries and health centres, and it’s a long-term passive income machine.
Its average lease has almost 10 years to run and the bulk of its income comes from the NHS. That’s about as reliable as it gets.
That reliability however, comes at a cost. It means chances to increase rents don’t come around often and negotiating can be tough. There’s also a risk that a change in government policy could affect demand. That’s impossible to rule out.
The firm has however, recently acquired its biggest competitor. That should strengthen its negotiating position.
Dividends are never guaranteed, but in terms of a reliable 7.5% yield, Primary Health Properties has to be worth considering.
AEW REIT
AEW REIT (LSE:AEWU) is the opposite of Primary Health Properties. But there’s more than one way to be a great investment.
The firm’s portfolio is a mix of different property types. These include leisure centres, gyms, and car parks.
The average lease is also much shorter, with less than six years to expiry. That obviously creates a risk of vacancies. With risk however, comes opportunity. AEW looks to use expiring leases as a chance to negotiate higher rents.
As a result, the firm focuses on properties with certain feafures. This can be low competition or scope for improvement.
Finding a 7.5% dividend yield with real growth potential is rare. So AEW has to be worth a closer look at today’s prices.
UK REITs
Stable businesses and high yields are an attractive combination. And UK REITs have been attracting attention recently. There are however, still some opportunities that I think are worth considering. These include Primary Health Properties and AEW.
A portfolio of stocks like these could be a valuable asset. And reinvesting dividends could generate real passive income.
