Do real estate investment trusts (REITs) make great dividend shares?

Imagine a dividend share that returns at least 90% of its profit to shareholders each year. Well, I reckon most experienced investors would probably say this isn’t sustainable and warn that the payout’s likely to be cut.

However, there’s one particular type of stock – a real estate investment trust (REIT) — that must do this to avoid having to pay corporation tax. And with this potentially lucrative privilege available, perhaps not surprisingly, there are many REITs listed on the UK stock market.

One that’s recently grabbed the headlines is Care REIT, which specialises in healthcare properties. On 10 March, its share price soared 32.5% after news of a takeover approach was revealed. CareTrust, a US-listed equivalent, sees the acquisition as a means of gaining entry to the UK market. However, even with the jump in its share price, the stock still trades at a discount to its net asset value (NAV).

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Undervalued or unloved?

And this appears to be a common problem with REITs.

Despite the attractive yields on offer, their stock market valuations tend not to fully reflect the value of their underlying assets. On the plus side, this could represent a buying opportunity. But it might also be a sign that sceptical investors have concerns about the prospects for the notoriously cyclical property market.

Take Tritax Big Box REIT (LSE: BBOX) as an example to consider. It invests in large distribution centres (warehouses), and boasts Amazon and Ocado among its tenants. Yet despite forecasts predicting that the global logistics market will be worth $6trn by 2030, this particular REIT trades at a 22% discount to its NAV.

But the trust has ambitious growth plans. In January, as part of its intention to expand into the AI market, it submitted a planning application to build a £365m data centre near Heathrow airport.

However, as with all REITs, it’s vulnerable to a slump in the property market caused by a wider economic slowdown. Unoccupied premises and tenants failing to pay rents on time is a potentially disastrous combination.

And although Tritax Big Box’s yield (5.4%) is above the FTSE 250 average, there are other REITs that offer a better return.

Passive income opportunities

Warehouse REIT also specialises in the logistics sector and is currently yielding 6.1%.

Based on its last four quarterly dividends, Supermarket Income REIT is presently offering a yield of 8%.

Similarly, Regional REIT is yielding 7.6%. But its share price has struggled since the pandemic. That’s because its portfolio comprises mainly offices and business parks. And with the move towards increased working from home, the demand for its properties has fallen. Rents in the sector have also come under pressure. Regional REIT’s share price fell heavily in the summer of 2024, after it announced a £110.5m rights issue to help refinance some of its debt.

With their above-average dividends, REITs can be attractive for income investors. Of course, payouts are never guaranteed. And if interest rates stay higher for longer, this could reduce earnings. That’s because these trusts generally borrow to fund property acquisitions. Higher finance costs are therefore likely to impact on the level of dividends paid.

Despite these challenges, I think investors looking for exposure to the property market could consider REITs. Their generous dividends could make them a good option for those looking for a healthy income stream.