Real estate investment trusts (REITs) can be excellent ways for share investors to generate passive income. In exchange for certain tax advantages, they have to distribute a set proportion of annual rental profits aside for dividends. This stands at a staggering 90%.
This doesn’t mean that these property stocks will automatically pay large dividends, naturally. But the steady stream of rental income that such shares tend to generate mean they often pay reliable and market-beating dividends.
What’s more, many of these shares operate in ultra-defensive sectors like healthcare, food retail and residential property. This provides them with added strength to deliver decent dividends during economic downturns.
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.
According to the London Stock Exchange, there are currently almost 50 of these investment trusts to choose from. Here are three of my current favourites.
Urban Logistics REIT
Like most property stocks, Urban Logistics REIT has slumped in value as interest rates have risen. This remains an ongoing threat that could depress its net asset values (NAV).
But the long-term outlook at the warehouse and distribution hub operator is extremely bright. This is thanks to the continuing growth of e-commerce, improving inventory management by businesses, and the rising importance of ‘last-mile delivery’.
Urban Logistics, whose growing property portfolio currently consists of 130 assets, is focused on the latter, which provides excellent earnings potential. Its forward dividend yield sits at a meaty 7.7%.
Primary Health Properties
As the UK’s elderly population rapidly increases, demand for the sort of medical properties Primary Health Properties specialises in should balloon. This is why I already own this REIT in my shares portfolio.
The company owns 514 properties including doctors’ surgeries, dentists, diagnostic centres and specialist medical facilities. Demand for such properties remains stable at all points of the economic cycle, which provides profits (and thus dividends) with an added layer of protection.
On top of this, the lion’s share of rental income Primary Health Properties receives is either directly or indirectly funded by a government body. While changes to health policy could impact future profits, things are looking good here as the government seeks to divert patients away from crowded hospitals.
Today, this UK share carries a huge 7.6% forward dividend yield.
Big Yellow Group
Self-storage businesses like Big Yellow Group may endure near-term trading turbulence as consumer spending comes under pressure. Latest financials here showed like-for-like closing occupancy as of June dropped to 85.2%, down 1.5% year on year.
But I believe this REIT remains a brilliant way to generate long-term passive income. Not only is demand for its space tipped to boom as e-commerce volumes rise, high levels in homeworking, a growing class of renters, and smaller newbuild properties are also boosting the need for self-storage units.
Big Yellow has 109 assets in its portfolio and a robust pipeline of another 11 properties. Today, it carries a decent 5% dividend yield, which I think also makes it an attractive passive income stock.
