Buying a second property and renting it out has been a lucrative business over the last couple of decades. House prices have risen significantly and rental growth has been strong.
However, things have changed. House price inflation has stalled, and rising tax and costs mean net rental yields are materially lower than in earlier times.
Today, I’d prefer to buy shares in stock market property companies where I see not only higher potential returns, but also the opportunity to diversify across different sub-sectors of the property market.
Arguably, buy-to-let remains economically attractive for large-scale professional operators, as opposed to small amateur landlords. If you believe this is the case, you may want to consider shares in Residential Secure Income and PRS REIT. Both companies specialise in this area.
For diversification into other areas, Primary Health Properties (LSE: PHP), which has increased its dividend every year for over two decades, and NewRiver REIT (LSE: NRR), which currently sports a yield of 11.1%, are two stocks I’d be happy to buy. Let me tell you more about them.
Reliable core holding
Primary Health’s record of annual dividend increases since its flotation in 1996 reflects its focus on a non-cyclical market. It invests in modern primary health facilities in the UK and Republic of Ireland. Its properties are let on long-term leases, backed by a secure underlying covenant where the majority of rental income is funded directly or indirectly by a government body.
Last week, the company raised an additional £100m from investors, having seen an increase in the number of opportunities for funding new developments. At the same time, it reiterated its intention “to maintain its strategy of paying a progressive dividend that is covered by earnings in each financial year.”
In July’s interim results, management had signalled a dividend for the full year of 5.6p per share, a 3.7% increase on the 2018 payout. At a current share price of 132.6p, this would give a yield of 4.2%. It’s not the highest around, but I think it’s one of the most secure, providing a reliable core holding for a stock portfolio.
NewRiver owns 33 community shopping centres, 23 conveniently-located retail parks and over 650 community pubs across the UK. Retail is a bit of a struggling sector, but NewRiver, which was founded in 2009, hand-picked its assets with a focus on the faster-growing and resilient sub-sectors of grocery, convenience stores, value clothing, health & beauty and discounters.
The company paid a dividend of 21.6p per share last year. At the current share price of 194.4p, this gives a yield of 11.1%. Now, when a yield is this high, it indicates the market is pricing in a risk of a reduced dividend in future. NewRiver’s payout last year was only 84% covered by underlying funds from operations (UFFO), a measure of cash profits.
However, management is confident about its strategies for increasing profits, and of “first re-establishing full cover and then growing the dividend in the future in line with UFFO.” On this front, I think news last week of property disposals at a blended net initial yield of 5.4%, with the proceeds recycled into acquisitions with a 9% yield, is highly encouraging.
Finally, the stock market currently offers attractive dividends across a range of other sectors. This means investors have the opportunity to further diversify their streams of passive income.
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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Primary Health Properties. 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.