I think real estate investment trusts (REITs) are great dividend stocks to buy for passive income. This is because they are obligated to pay a minimum of 90% of annual profits to shareholders by way of dividends.
I believe these property stocks could be particularly great to own in the current climate too. Even if economic conditions worsen, earnings at such businesses should broadly remain stable. This is thanks to the long rental contracts they tie their tenants to.
The PRS REIT (LSE: PRSR) is one such stock I’m considering snapping up for 2023. This particular share offers an extra layer of security to investors as it operates in the private residential rental sector. Spending on rent or mortgages is one of the last things people cut during tough times.
Fast-rising rents
In fact, the outlook for the residential rental market is improving rapidly right now. According to Rightmove, the number of enquiries for rental properties has surged 23% over the past year. And while demand is soaring, the number of available properties is steadily declining as buy-to-let landlords exit the market on rising costs.
This growing imbalance propelled private rents 3.8% in the 12 months to October, ONS data shows. The problem looks set to worsen considerably in the near term too, as rising interest rates and economic uncertainty discourage renters from buying their own homes.
Expanding for growth
Shortages of family houses are particularly high right now. This is why trading at PRS REIT, a specialist at this end of the market, is especially strong.
Like-for-like blended rents rose 5.1% here in the 12 months to June. At the same time, re-lets to new tenants rose around 10% over the year.
Encouragingly for investors, PRS REIT is rapidly expanding to capitalise on these favourable market conditions. It raised the number of homes on its books to 4,786 in financial 2022, up an impressive 20% year on year.
And this, combined with that aforementioned rental growth, grew revenues and post-tax profit 58% and 163% respectively from a year earlier.
What’s more, the company plans to have 5,600 homes in its portfolio generating income.
A top-value stock
As I said, rising interest rates have boosted demand for rental homes more recently. However, this is also pushing up the costs PRS REIT is paying to servicing its debt. At the same time, it is also having to grapple with increased building costs, putting a strain on profits.
But increasing cost pressures aren’t enough to darken the REIT’s excellent investment case, in my eyes. In fact, I think it’s a top stock to buy following recent share price weakness.
At 83p per share, PRS REIT trades on a forward price-to-earnings growth (PEG) ratio of just 0.7. It also packs a market-beating 4.4% dividend yield. This represents exceptional value, in my opinion. And so I’ll be looking to buy with the business if I have cash spare to invest.
