The FTSE 100’s dividend yield of 4% is towards the upper end of its historic range. This means that it could offer an impressive income return for the long run, and that the indiex may also be undervalued at the present time.
However, with inflation already standing at 3% and forecast to move higher, a 4% dividend yield may not remain a real-terms income return in the medium term. Therefore, buying these two investment trusts with higher dividend yields than the FTSE 100 could be a shrewd move.
Reporting on Monday was Midlands-focused property Group Real Estate investors (LSE: RLE). The REIT announced the sale of 24 Bennetts Hill in Birmingham for a cash consideration of £4m. This is a premium to book value and represents a 5.9% net initial yield. It also means the business has almost doubled its money versus the £2.06m it paid for it in December 2014.
In addition, Real Estate Investors has also completed the letting of Peat House in Leicester. The building is fully occupied and produces a rental income in excess of £0.5m per year. This has contributed to a record occupancy across the company’s portfolio of 95%, which suggests that it could enjoy continued strong momentum in future.
With a dividend yield of 5.1%, the company looks set to offer a real income return in the long run. Furthermore, its bottom line is expected to increase by 14% next year and this is due to prompt a rise in dividends of around 7%. This means that not only does it have an above-inflation dividend yield, its shareholder payouts could rise at a much higher rate than inflation in future years. As such, now could be the perfect time to buy a slice of the business.
Also offering an impressive outlook is fellow REIT Hansteen (LSE: HSTN). The company’s asset base appears to be strong after several changes have been made, with its profitability due to rise by around 20% next year. This suggests that the performance of its end markets could continue to be strong, albeit with some uncertainty being present.
A double-digit rise in earnings is expected to prompt a rise in dividends of 6.3% in the 2018 financial year. This puts the company on a forward dividend yield of 4.7%. Beyond next year, there could be scope for a further rise, as the company appears to have a sound strategy which is benefitting from continued strong demand for rental space.
As well as this, Hansteen could deliver a rising share price. Its dividend yield suggests that it may offer good value for money, while a price-to-earnings growth (PEG) ratio of just 0.9 may do likewise. Therefore, although the UK economy may face an uncertain future due in part to Brexit and the potential challenges it may bring, now could be the right time to buy a REIT such as Hansteen for the long term.
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Peter Stephens owns shares in Hansteen. The Motley Fool UK has recommended Hansteen Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.