A real estate investment trust (REIT) is a special type of income stock. To get certain tax benefits, the business must earn a minimum proportion of cash from properties. In turn, it has to pay out at least 90% of profits to shareholders. Logically, this comes in the form of dividends. Therefore, REITs can offer investors high potential yields when it comes to searching for a place to make dividend income.
Working with the public sector
A good example is Civitas Social Housing (LSE:CSH). This business invests in social care housing and healthcare facilities around the UK.
The portfolio of 697 properties works with 178 local authorities and houses several thousand tenants. From the income derived from the property portfolio, it pays out a quarterly dividend to shareholders.
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The current dividend yield is 9.75%. Part of the move higher in the yield over the past year has come from the decrease in the share price. A 34% fall certainly isn’t great, but it does reflect the sector-wide slump.
This fall relates not only to the property values in the REIT, but also higher future financing costs due to the increase in interest rates relative to a year ago.
Even with this risk, I’m confident of sustainable dividend income going forward. The main clients of the trust are housing associations and soon will include the NHS. When lease agreements are signed by the public sector, I feel they are unlikely to default. This makes it an appealing buy for investors in my opinion.
Diversified income streams
The second stock is the Alternative Income REIT (LSE:AIRE). Over the past year, the share price has dropped by 16%. The dividend yield stands at 8.38%.
I like the REIT because it does what the name says – finding alternative property-related income sources. This includes areas such as leisure, hotels, healthcare, education, logistics, and automotive. In practical terms, this ranges from a Premier Inn in Camberley to a Volvo showroom in Slough.
The fact that it spreads the risk of receiving lease and rental income over different sectors means it’s more diversified. This should reduce the risk of losing revenue if one area of the market struggles in coming years.
Investors do need to be careful about the market cap. It currently sits at £54m, which isn’t huge. The issue this can cause is a lack of trading liquidity. This can contribute to erratic moves in the share price, driven by relatively small buy or sell transactions.
Building into a robust portfolio
I feel both income stocks could add value to a dividend portfolio. I speak of it being a game-changer due to the high yields on offer. This can help to materially lift the average dividend yield of an existing portfolio. Yet if combined with several other existing stocks, it doesn’t have to significantly increase the risk overall.
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.
