I’m looking to buy quality real estate investment trusts (REITs) to help me build a second income stream.
The beauty of REITs is that they must return 90% of profits to shareholders. This makes them attractive to passive income seekers like me.
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.
Two REITs that could help me with my aims are Greencoat UK Wind (LSE: UKW) and Primary Health Properties (LSE: PHP).
The numbers
Before I dive into both picks, let me explain how I could earn myself this additional income.
Let’s say for the purposes of this article I had £50K in savings right now.
I could split this amount down the middle and buy shares in both stocks.
With £25,000 invested into Greencoat, and a dividend yield of 7.2%, I could have an annual income of £1,800. The other £25,000 invested into Primary shares, and a yield of 7%, equates to an annual income of £1,750.
Adding the two total together, and dividing by 12 months, offers me a monthly average second income of £295.
However, it’s worth remembering that dividends are never guaranteed. Plus, the rate of return could go down, or even up, at any time.
Why I like both stocks
Greencoat owns and operates onshore and offshore wind farms. Primary owns and operates healthcare properties, such as GPs’ surgeries.
There is a reason I’ve chosen these picks specifically. I believe they both possess defensive traits. Energy and healthcare are both essential for everyone. This could help keep performance and returns stable, supporting my aspirations of additional income.
Greencoat has been on a great run in recent years. In fact, management has hiked its dividend annually for eight years now. Another increase could be around the corner. A lot of this is linked to its increased output in energy, excellent customer relationships, and boosted sentiment towards fossil fuel alternatives. It can count powerhouses Centrica and SSE as customers.
The risky part for me is the fact that the property market, and borrowing for growth, could come with real challenges at present. Increased costs could put a dent in its balance sheet and return levels, if executed incorrectly.
As for Primary, the fact it rents many of its provisions out to the NHS is attractive. This is because long-term contracts with very limited chances of defaults equals stable income.
There are two risks for Primary I’ll keep an eye on. One is debt levels. If they continue to rise or need to be refinanced at a higher rate, could hurt growth and returns. The other issue is that of the changing face of the NHS. Staffing provisions is getting tougher by the day due to many leaving the service or moving abroad. Primary could have the properties, but if the NHS can’t staff them accordingly, there could be occupancy issues for the business.
At present, both businesses have decent fundamentals, excellent passive income prospects, and defensive traits. These aspects could help maintain a stable income for juicy dividends.
