Real estate investment trusts (REITs) can be brilliant cash machines, delivering big dividends for investors year after year. This is thanks in part to the unique way they’re set up. In order to receive tax breaks, they need to distribute at least 90% of their annual rental profits to shareholders.
This alone doesn’t guarantee large and growing dividends over the long term. But combined with other factors — like long tenant contracts and exposure to different sectors — it can make them formidable passive income providers.
This is shown by the stunning payout records of LondonMetric Property (LSE:LMP), Safestore Holdings (LSE:SAFE), and SEGRO (LSE:SGRO). Collective dividends across these three trusts have risen every year for more than three decades.
Want to know what makes them formidable dividend stocks? Read on.
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LondonMetric Property – 10 years of dividend growth
LondonMetric is a classic, rock-solid REIT. It has clients tied down on ultra-long contracts (current average lease term: 17 years). And its portfolio holds 670 different assets, meaning isolated tenant issues don’t impact profits at group level.
Yet this trust has an ace up its sleeve: it’s the UK’s largest triple net lease (NNN) REIT. It means the tenant and not LondonMetric is responsible for property taxes, maintenance costs, and insurance charges. Rents are lower as a result. But earnings visibility is much better, as unwelcome earnings shocks are better avoided.
The forward dividend yield here is 6.5%. I think it’s a great dividend share to consider, though, as with all property stocks, profits could come under pressure if interest rates rise.
Safestore Holdings – 12 years of dividend growth
Safestore is the UK’s largest self-storage specialist, one of the fastest-growing parts of the property sector. With 214 separate properties in its portfolio, dividends have risen strongly along with earnings for more than a decade. I’m confident the trust should keep delivering as factors like e-commerce, a rising domestic population, and changing consumer habits drive market growth.
There is a drawback here, however. Unlike LondonMetric, this company only focuses on one sector, which creates greater concentration risk. By comparison, the other REIT I’ve described has exposure to logistics, healthcare, leisure, and retail.
On the other hand, it is better diversified by region — as well as the UK, it owns dozens of assets in Mainland Europe, which sets it apart from most other British REITs. Its forward dividend yield is a healthy 4.7%.
SEGRO – 12 years of dividend growth
SEGRO has an even better dividend yield, at 4.8%. It also has a dozen straight years of dividend growth behind it, helped by its focus on warehouses and logistics assets.
This has driven profits steadily higher, as the growth of online shopping and post-pandemic supply chain changes have supercharged demand. The subsequent shortage in available properties has meant SEGRO’s enjoyed robust rental growth. This shortfall looks set to last too, underpinning future earnings and dividends.
There are a couple of other reasons why I like this FTSE 100 stock. Its expansion into data centres provides added growth opportunities. It also has an expanding portfolio in Continental Europe to complement its UK base.
Rent increases may be harder to come by during economic downturns. But I’m still expecting SEGRO to be one of the UK’s best-paying REITs.
