Falling share prices mean better yields for passive income investors. And there are a couple of dividend stocks that stand out to me at the moment.
Both are real estate investments trusts (REITs). The property sector has been hit harder than most by rising interest rates recently, but I think this makes it a good place to go looking for stocks to buy.
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.
Passive income stocks: our picks
Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…
Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.
What’s more, today we’re giving away one of these stock picks, absolutely free!
REITs
REITs are businesses that make their money by owning and leasing buildings. Some focus on one type of property, others own a more diversified mix.
Ordinarily, companies can choose what to do with the cash they generate. They can use it to pay down debt, invest it for future growth, repurchase their own shares, or pay it out as dividends.
REITs have less flexibility than other businesses, though. In exchange for beneficial tax status, they are required to distribute 90% of their taxable income to shareholders via dividends.
The inability to retain their earnings makes it more difficult for them to grow. But from a passive income perspective, it can make them very attractive.
Healthcare
Primary Health Properties (LSE:PHP) is a FTSE 250 REIT that focuses on health centres and GP surgeries. The firm’s portfolio consists of 513 buildings.
The stock has fallen 46% since August 2021, pushing the dividend yield up above 7%. The underlying business looks to me like it’s steadily moving forward.
During 2023, rental income increased by 5.5%, most driven by higher renewal rates. And the portfolio is still over 99% occupied, mainly by government agencies that are unlikely to default.
A high loan-to-value ratio is a risk when Primary Health Properties has to refinance its own debt. But the majority of this is a long way off and lower interest rates should help with it.
Retail
The rise of e-commerce has led to a decline in demand for retail properties. But I think that US-listed REIT Realty Income (NYSE:O) is well-positioned to keep moving forward.
The shift to online shopping during the pandemic may have eased, but physical retail still faces challenges. So it’s perhaps unsurprising the stock is 34% below its pre-pandemic levels. I think the 6% dividend yield looks like an opportunity though.
The firm’s focus on quality tenants in industries less affected by e-commerce – such as grocery and convenience stores – has been effective for shareholders. And I think it can keep going.
Admittedly, focusing on tenants with strong credit ratings makes rent increases harder to negotiate. At today’s prices, though, I don’t think the company needs to do much to be a good investment.
Consistency
Besides significant price declines and high yields, the two REITs I’ve identified here have two things in common. The first is that they’re both focused on specific industries.
While there’s some merit to diversification, I quite like this. It allows management to develop a closer understanding of the specialist sectors.
The other thing they have in common is a strong track record of dividend growth. Each company has over 25 years of consecutive dividend increases.
That’s no guarantee of what will happen in the future. But I do think it’s a sign of a robust business model that has proven itself through difficult times before.
