Stocks with high dividend yields can be risky investments. But they can also be huge opportunities for passive income.
Sorting the risks from the opportunities isn’t easy. In my view, however, there are at least a couple that are worth looking at in June.
REITs
When it comes to passive income, I’m a big fan of real estate investment trusts (REITs). These are distinctive businesses with some unique features.
REITs were designed to help people access the property market without needing a huge deposit. And from that perspective, they work.
Fundamentally, REITs own and lease properties to tenants. And they return 90% of their taxable income to investors as dividends.
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The downside is that growth can be limited. If you have to distribute all your cash, you can’t use it to buy more properties.
So why do it? The big advantage is that real estate investment trusts – legally – are exempt from paying tax on the income they generate.
In general, this makes REITs some of the more stable passive income stocks around. And the trade-off for limited growth is higher dividend yields.
Primary Health Properties
I said that REITs are known for stability. But Primary Health Properties (LSE:PHP) arguably takes this to the next level.
The firm owns and leases GP surgeries and healthcare centres. And around 88% of its rental income comes from government-funded entities.
That means high occupancy rates, strong rent collection metrics and low default risk. All of these are very positive for long-term income investors.
With a 57% loan-to-value ratio, the firm has a lot of debt. And despite long-term leases and reliable tenants, that’s something to keep an eye on.
At 92.45p a share, the stock comes with a 7.79% dividend yield. And its record of increasing this over time is a thing of beauty.
Source: Fiscal.ai
The growth isn’t spectacular, but it is consistent. That’s why I think income investors should have the stock on their radars.
AEW REIT
In many ways, AEW REIT (LSE:AEWU) is the polar opposite of Primary Health Properties. Instead of stability, it looks for opportunities.
The firm focuses on leases that are close to expiry. This is a high-risk strategy – no REIT wants vacant properties.
That’s a danger when contracts start to run down. But AEW aims to limit this danger by focusing on areas with limited supply.
This means tenants have limited alternatives. And by targeting properties where it can add value, re-leasing becomes a chance to increase rents.
With this type of strategy, managing debt levels is extremely important. But this is something the firm does very well.
Source: Fiscal.ai
A 7.55% dividend yield means AEW shares are worth considering. And the stock could add an interesting dimension to a passive income portfolio.
Passive income
Different investors – rightly – have different ambitions. My own focus is on looking for companies that can reinvest and compound their earnings.
This is a real challenge for REITs that have to distribute their income as dividends. For passive income, however, they can be a great choice.
REITs have a lot in common, but they aren’t all the same. But with Primary Health Properties and AEW, there might be something worth considering for everyone.
Stephen Wright does not own shares in any of the companies mentioned.
