Cash ISAs continue to erode UK savers’ wealth due to inflation outpacing the returns from cash. That’s why I think passive income from this FTSE 250 property stock looks far more appealing to me right now than just sitting in cash.
A warehousing specialist
Warehouse REIT (LSE: WHR) owns and manages warehouses in urban areas across the UK. This real estate investment trust (REIT) focuses specifically on serving the e-commerce fulfilment industry. That’s why 99% of its 90 warehouse estates are within two miles of a town centre, transport hub, or motorway.
Its occupiers are typically small and medium-sized enterprises. I expect demand for e-commerce to remain strong for decades, so I’d feel comfortable drip-feeding money into the shares every week.
Plus, the stock looks incredible value to me. There has been widespread fear about a slowdown in the property market. As such, the firm’s market capitalisation is now less than its net asset value. That leaves a considerable margin of safety for new investors.
A grand a year in passive income
As of today, one share trades for 111p, with a prospective dividend yield of 5.8%. That means 79 shares per week would cost me just over £87. And if I bought those 79 shares consistently every single week for one year, I’d have 4,108 shares. They would pay me £263 annually.
After four years, I’d have 16,432 shares, which would pay me over £1,000 in annual passive income.
| YEAR | SHARES (79 x 52 weeks) | PASSIVE INCOME |
| 1 | 4,108 | £263 |
| 2 | 8,216 | £525 |
| 3 | 12,324 | £788 |
| 4 | 16,432 | £1,050 |
If I reinvested the dividends instead of taking the income, then I’d have over 1,000 extra shares after four years. That’d mean I’d be earning even more than £1,050 a year in passive income.
Better still, this is all based on the assumption that the payouts stay flat for four years. In reality though, the REIT’s aim is to provide rising stable income. So I’d ideally be getting more and more income from my shares as each year passes.
Of course, the share price won’t stay static over four years. It’ll likely go up some weeks, which means I’d get fewer shares for my money. And it’ll also likely go down some weeks, which means I’d get more shares and a higher yield.
But drip-feeding my money in every week eventually smooths out the ups and downs. It’s called pound cost averaging, and has been proven to be far less risky than single lump-sum investments.
Risks
The company has an average lease term of just over five and a half years. This doesn’t seem particularly long, which presents risks if a severe economic downturn leaves a portion of its properties empty. That could even lead to the dividend getting cut.
However, the firm targets multi-let estates, which spreads risk and offer more asset management opportunities than single-let assets. That translates into an occupancy rate of 92.7% today, which is healthy. But I’ll be monitoring that occupancy figure moving forwards.
Despite the risks, this REIT certainly qualifies as an excellent addition to my income portfolio. I’ll be buying shares once I have more capital to invest. And I’ll be drip-feeding money in regularly – as well as reinvesting the dividends – to maximise my long-term passive income.
