Another stock I’m looking to add to my holdings when I next have some investable cash is LXI REIT (LSE: LXI). Here’s why!

Long leases provide stable income

LXI focuses on acquiring and renting out a diverse range of property assets to yield income. This is a bullish trait I like as diversification can offer protection against a downturn in one area. Plus, the business looks to tie down its tenants to longer term leases, 20 to 30 years, ideally.

The attraction of REITs is that they must return 90% of profits to shareholders, hence why I view them as ideal second-income stocks.

LXI shares have struggled in recent months. I’m not surprised, nor worried. Macroeconomic issues including soaring inflation and rising interest rates have caused havoc with markets as well as the property sector.

The bull and bear case

As I’m bullish on LXI shares, I think it prudent to share risks that could hinder any payouts I’m looking to receive.

Firstly, the business did announce an ill-fated deal to snap up 18 Sainsbury’s supermarkets earlier in the year. The deal did not go ahead as it would have meant borrowing heavily to finance the deal. Unfortunately, the shares haven’t quite recovered yet.

Growth is tricky in high interest times, like now. I’ll keep an eye on the firm’s growth plans, with the hope there aren’t any further bumps in the road.

Another issue for LXI is the fact that a lot of its tenants could find it harder to pay their rent, despite long-term leases in place. This is directly linked to the current economic outlook and cost-of-living crisis. Defaults are never good news for REITs. This can hinder profits and payouts.

On to the good stuff then, LXI’s modus operandi of tying its customers into long-leases is great for me. This is because it can ensure stable income and passive income. At present, its average tenancy stands at over 25 years until the first break clause.

Moving onto the level of return, LXI’s dividend yield of 8.5% is significantly higher than the FTSE 250 average of 1.9%. However, I do understand dividends that are never guaranteed.

Finally, LXI shares look decent value for money right now on a price-to-earnings ratio of 11. They could fall further during the current market volatility, which would make them even more enticing for me.

Long-term gains

I understand that LXI could come under shorter-term pressure. However, I’m a long-term investor – which I’d define as a five- to 10-year period – therefore I’m more interested in the extra income LXI shares could provide me over this time period.

I reckon LXI’s long-term lease business model, as well as its diversification strategy, is key for it to be a great income stock for me and my holdings.

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One technique I like to use in this situation is to look for shares that are trading close to their 52-week lows. These have typically underperformed the market for some reason, but they may now be close to a turning point.

My latest trawl through the market has unearthed two possible bargain buys.

An affordable treat

My first choice is drinks firm Nichols (LSE: NICL), which owns the Vimto brand. This is popular in the UK, but also has a big following in some overseas markets, especially the Middle East and Africa.

Sales were hit hard by pandemic restrictions on pubs and restaurants. But the out-of-home market has largely returned to normal now. Nichols also has plans in the pipeline that management believes could deliver “significant opportunities” for higher profits.

For me, this company has two big attractions. One is that it’s a defensive business, selling an affordable product that’s bought regularly by many people.

Vimto’s strong brand has supported double-digit profit margins for many years. Until the pandemic, Nichols’ dividend had not been cut for 30 years.

The second attraction is that it’s a family business with very conservative finances. At the end of December, the company reported a net cash position of £56m — equivalent to 15% of the current share price.

Of course, there’s always a risk that Nichols’ best days are behind it and that it will continue to suffer from a lack of growth. I can’t be sure this won’t happen, especially in today’s tough economic climate.

The future is always uncertain. But on balance, I think the proven quality of this business should drive further success. In my view, Nichols shares could be a good long-term investment at current levels.

A reliable 5.5% income

My second choice is quite different. FTSE 250 property group LXi REIT (LSE: LXI) specialises in owning properties with very long leases.

The majority of the group’s portfolio is made up of budget hotels (Travelodge/Premier Inn), theme parks (including Alton Towers and Thorpe Park), private hospitals, and supermarkets.

Overall, LXi’s portfolio has 80 tenants, with a weighted average of 27 years until the first lease break, or expiry.

Management has completed some refinancing this year, which I think has reduced the risk of future problems. However, the firm hasn’t avoided missteps completely.

LXi’s share price slumped in September after the company announced a £500m deal to buy 18 Sainsbury’s supermarkets. Funding the deal would have required a sizeable share issue as well as new debt.

LXi subsequently withdrew from this deal, but the share price hasn’t yet recovered. However, three directors have bought more than £800,000 of stock since then. This suggests to me they believe the shares offer value at current levels. I agree.

A nasty UK recession could put pressure on some of LXi’s key tenants. But on balance, I think this situation looks a good bet for long-term income. With a forecast yield of 5.5%, I’m tempted to add LXi to my own portfolio.

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Income stocks to buy

The first on my list is Domino’s Pizza Group (LSE: DOM). With a dividend yield of 3.8%, at the time of writing, I think the stock offers an attractive income level. As the firm’s earnings per share have grown from 13.8p to 18.2p over the past five years, the payout has also expanded by 84%. If this growth continues, I think the company could potentially increase its distribution to investors. 

That said, Domino’s reported windfall profits last year from the pandemic. As such, the company’s dividend growth may slow this year as restrictions on eating out are eased. 

Still, I’d buy the income stock due to its track record of dividend growth and expansion plans. 

Property income

My list also includes Assura (LSE: AGR), which owns and operates healthcare facilities around the UK. This is a defensive business as the country will always require specialist facilities for the healthcare industry.

Set up as a real estate investment trust (REIT), Assura has to return the bulk of its income to investors to achieve tax benefits. As a result, the company offers a desirable dividend yield of 3.8%. 

The payout has grown steadily over the past five years as the company increased the size of its portfolio. The latest edition is an ambulance hub development in the West Midlands. Based on these positives, I’d buy the group for my portfolio of income stocks. 

Despite its attractive qualities, Assura is exposed to some risks. Chief among these is the fact the government is one of its largest customers. If this customer decides to reduce spending, or take property services in-house, the group’s income could fall. 

Another property company I’d buy for my portfolio of income stocks is LXI Reit (LSE: LXI). Just like Assura, this REIT has to return the bulk of its income to investors to achieve tax benefits. It also currently offers a dividend yield of 3.8%. 

Unlike Assure, LXI’s portfolio is incredibly diversified. It owns healthcare properties, hotels, industrial asset and retail assets. 

Unfortunately, this diversification means the group has suffered more over the past 12 months than its healthcare peer. As a result of the impact of the Covid-19 pandemic on its income, LXI’s full-year dividend is 3.5% lower than last year. This is disappointing, but I believe the overall package offered by the enterprise is appealing. 

Wealth manager

The final company I’d buy for my portfolio of income stocks is Rathbone Brothers (LSE: RAT). The equity currently offers a dividend yield of 3.8%.

The yield is supported by fees on assets managed by the group. These assets are growing steadily. In the three months to 31 March, funds under management and administration edged up 2% to £55.8bn, reflecting “continued good organic growth.”

As assets under management continue to expand, I’d buy the shares. Although, if assets under management start to decline, income may slide. This could put the company’s dividend under pressure. The threat of declining assets under management is the most considerable risk hanging over the stock today. 

Nonetheless, I’m confident in Rathbone’s growth potential as we advance. 

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Real estate investment trusts are the perfect dividend stocks. Their dividends are paid out from property income, which is stable and recurring. What’s more, investors can benefit from a rise in the value of the underlying property. 

Building up the portfolio 

LXI Reit (LSE: LXI) is a relatively new trust, and as a result, flies under the radar of most investors. The firm only went public at the end of February and since its IPO, management has been building up the portfolio with funds received from the listing as well as a £55m loan facility. 

Today it announced that it has finished its investment programme, having spent the majority of its funds on a high-quality commercial property portfolio. Across the company’s assets, the average net initial yield is 5.94%, and the weighted average unexpired lease term to first break is 24 years, giving a steady income stream for the next two-and-a-half decades. The income is secured against 17 strong tenants, including the likes of Aldi, Costa Coffee and General Electric while 96% of the leases have index-linked rent uplifts. 

LXI was founded with the goal of producing a steady, secure, inflation-linked income to investors, and it looks as if its property portfolio will help the company meet this goal. Management is targeting a minimum annual dividend of 5p per ordinary share, starting from the financial period commencing 1 April 2018. 

Based on today’s stock price, the expected 5p per share payout works out as a yield of around 4.9%. As well as the 5p per share dividend target, LXI is planning to produce an 8% per annum return for investors over the medium term. This goal will be achieved with the 4.9% dividend yield and yearly valuation uplifts of the property portfolio. 

Unfortunately, as the company has only just completed its property acquisitions, there’s no detail as of yet on the net asset value per share — the metric that’s generally used to value REITs — although the targeted 8% per annum return makes the LXI look highly attractive for buy-and-hold investors. 

Defensive income

Secure Income REIT (LSE: SIR) is one of my favourite REITs because the company has a record of producing returns for investors and has a defensive property portfolio. Indeed, the company’s property portfolio contains 20 freehold private hospitals, giving it an extremely stable income stream from defensive assets. Overall, the group owns a portfolio of 81 real estate assets with a weighted average unexpired lease term of over 23 years and a net initial yield of 5.3%. 

Since 2007, according to the company’s figures, the return on its assets (both income and capital growth) has averaged between 9.5% and 8.5% per annum since inception. And since the REIT’s IPO in June 2014, it has produced a total return for investors of 61%, a compound annual return of 17.2%. 

City analysts expect Secure to pay a dividend of 13.9p per share to investors this year, giving a dividend yield of around 4%. The last reported net asset value per share was 324p, so at the time of writing, shares in Secure trade at a premium of approximately 8% to the underlying asset value. 

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