One penny stock I reckon could help towards my goal of a second income stream is Residential Secure Income REIT (LSE: RESI).
Here’s why I’d buy the shares when I next have some investable cash!
Affordable housing
Residential Secure Income is set up as a real estate investment trust (REIT). It invests in socially affordable housing properties and rents these out to make money.
The allure of REITs is that they must return 90% of profits to shareholders. This is one of the reasons I already hold positions in a few REITs as I look to boost my passive income.
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Residential shares have been falling recently. I reckon this is due to macroeconomic volatility, which has hampered the property market. Over a 12-month period, the shares are down 28% from 76p at this time last year, to 54p, as I write.
The positives
Firstly, demand for affordable and social housing is sky high at present. Demand is outstripping supply by some distance. As the population ages and grows, this could be the case for a number of years yet. In addition to this, with interest rates high, getting on the property market has never been harder, therefore demand for rental properties is increasing too. All of this is positive for Residential and could help boost performance and returns.
Next, a dividend yield of 7.6% is higher than the FTSE 100 and FTSE 250 averages of 3.8% and 1.9%. However, I’m aware dividends are never guaranteed.
Finally, Residential released full-year results for the year ended 30 September 2023 back in December. I thought they were positive, but there were signs that the economic picture has impacted the firm. Rental revenue grew by 6.1% and demand for its properties remained high.
Furthermore, the business paid a final dividend of 5.16p, the same as last year, and it looks well covered too, looking at its balance sheet. However, cash generation and net asset values dropped slightly, the former due to higher costs, and the latter due to the current difficult property market. Finally, the firm’s rental collection figures came in at a whopping 99%, which is impressive.
Risks and final thoughts
Residential could find growth harder to come by. Soaring costs for house builders mean less completions across the industry. This could mean fewer properties for it to buy and rent out to make money from.
Next, although it seems the business is in a good position financially, as with most property firms, they often borrow to help growth and buy assets. Paying down debt during times of higher rates can be risky as the repayments could be higher. This could hurt Residential’s balance sheet and any payouts.
Looking at Residential’s current fundamentals, results, and future prospects, I reckon it will continue to grow. Once macroeconomic volatility subsides, these shares could really help boost my passive income.
