I’d buy cheap REITs with £500 to target a £500k nest egg

Real estate investment trusts (REITs) can be a powerful addition to a retirement portfolio. These types of businesses are notorious for offering impressive dividends that can build into a chunky passive income with minimal effort. And when left to reinvest over the long term, a carefully constructed portfolio of top-notch stocks could even transform into a £500,000 nest egg.

The power of investing regularly

Dividend investing often doesn’t get associated with high levels of growth. After all, it’s typically only large mature businesses that redistribute excess earnings back to shareholders. Yet despite this, dividends have historically provided the lion’s share of investment returns. In fact, since 1960, an estimated 85% of gains have come from shareholder payouts.

There are a few reasons behind this phenomenon. However, the leading catalyst is the miracle of compounding. By regularly investing a lump sum each month, as well as automatically reinvesting any dividends received, the number of shares owned in each business increases. For each additional share, more dividends are received when the next payment date comes around. And this process repeats then repeats itself over and over again in a wealth-building loop.

Turning £500 into £500k

Ensuring that a portfolio has a constant, steady stream of capital is essential. The more an investor can spare each month, the better. However, it’s critical to try and mitigate, or better, eliminate any risk of falling short. Why? Because in the long run, missing out on even just one month of investing can leave a lot of money on the table.

To demonstrate, £500 compounded at 9% for 25 years is worth around £4,700. In other words, for each missed month, investors lose almost five grand of wealth. But for those who consistently invest at this rate of return without missing a beat, they can expect to have just over £560,000.

Of course, achieving a 9% return each year is easier said than done. The FTSE 100 has historically only offered around 8%, and over the last decade, it’s actually been closer to 6%. This is where REITs come to the rescue. With their chunky yields and steady share price appreciation, reaching a 9% target becomes a bit more straightforward.

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.

A top REIT to buy now?

Take Greencoat UK Wind (LSE:UKW) as an example. Since going public in 2013, the stock price has increased by an average of around 3.4% each year. But at the same time, the stock has offered an average yield close to 5.6% which, when combined, delivers the 9% return we’re after.

Today, the wind farm owner is offering an even more impressive payout of 7.3%. And should that be maintained moving forwards, investors could end up with even more in their pension pot after 25 years, or reach £500k sooner than expected.

However, like with every investment, nothing is risk-free. REITs may have a strong reputation for paying dividends, but they’re also known for operating with a lot of debt. And with interest rates now elevated, leveraged balance sheets are under pressure. And Greencoat’s no exception.

In fact, that’s precisely why the yield in 2024 is sitting higher since lower confidence from investors has dragged down the valuation. While this threat cannot be ignored, management seems to be keeping things under control.

And since demand for renewable energy is expected to continue surging in the coming decades, Greencoat looks like a terrific REIT to own right now. That’s why it’s already in my retirement portfolio.