Real estate investment trusts (REITs) are magnets for investors seeking passive income. Sector rules state that these property stocks are
Required to distribute at least 90% of their taxable income for each accounting period to investors, where the income is treated as property rental income rather than dividends.
– London Stock Exchange
This is the price REITs pay for the tax breaks they receive. And it makes them no-brainers for regular juicy dividends, right? Well not exactly…
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.
Dividend heroes
Like any share, these companies’ profits can come under pressure from a variety of company- or industry-specific problems, or stress in the broader economy. REITs have less discretion over what to do with their rental profits each year. Yet this doesn’t guarantee either a large or growing dividend every year.
However, some property investment trusts are more resilient than others. Take the following three: Supermarket Income REIT, Primary Health Properties, and Unite Group (LSE:UTG).
Not only do they have long records of dividend growth. Their forward dividend yields also more than double the FTSE 100 average of 3%:
| REIT | Years of consecutive dividend growth | Forward dividend yield |
|---|---|---|
| Supermarket Income REIT | 7 | 7.5% |
| Primary Health Properties | 29 | 7.8% |
| Unite Group | 6 | 7.2% |
Reliable passive income
Primary Health Properties has raised dividends every year since the mid-1990s. And though Supermarket Income’s record doesn’t look half as impressive, it was only founded in 2017. Since paying its first dividend, dividends have risen every year since it listed on the London stock market.
This durability reflects in large part these REITs’ ultra-defensive operations. Supermarket Income rents out properties to major food retailers, whose revenues remain stable from year to year. Primary Health’s operations are even more resilient — it owns and operates healthcare properties like GP surgeries, dentists, and pharmacies, from which roughly 90% of rents are guaranteed by government bodies.
Rental earnings can be impacted by rising interest rates and changes in property valuations. But on balance, both these top dividend stocks deserve serious consideration.
An unloved REIT to buy?
But what about Unite Group? I also think it merits serious attention following recent share price weakness. It’s shed a whopping 40% of its value over the last 12 months.
Today it trades on a forward price-to-earnings (P/E) ratio of 8.6 times. Combined with that 7%+ dividend yield, it offers the kind of all-round value I love.
Unite’s shares have tanked as the cost-of-living crisis has damaged demand for student accommodation. As inflationary pressures rise, this could remain a problem. But looking long term, the outlook for this property sector remains robust, driven by rising numbers of international students.
In the meantime, I believe investors can expect a steady flow of rising dividends. Shareholder payouts have risen every year since 2011, stripping out 2019 when the pandemic hit dividends.
I’m confident each of these three top REITs will continue paying large and growing dividends. If they deliver the dividends City analysts are tipping, investors will enjoy a £750 passive income this year alone, based on a £10,000 ISA investment.
Should you invest £5,000 in Unite Group Plc right now?
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Royston Wild owns shares in Sage.
