Today investors can pick up a wide range of investment trusts ‘on the cheap.’ Recent stock market volatility means many now trade at a large discount to their net asset values (NAVs), and rising dividend yield makes them attractive candidates for those seeking dividend stocks.
Here is one of my favourites, and especially at the moment as economic uncertainty grows.
Trust the process
Real estate investment trusts (REITs) are designed in a way that can make them ideal candidates for passive income. In exchange for tax reductions, these investment vehicles must pay at least 90% of yearly rental profits out in dividends.
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This doesn’t guarantee that shareholders will enjoy a large and/or growing second income, as cash rewards are still tied to earnings. But it does mean the business has less flexibility to decide to limit, reduce, or eliminate dividends than other shares.
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.
On top of this, some property trusts provide added peace of mind to investors by operating in defensive sectors. This is why I think Social Housing REIT (LSE:SOHO) is worth serious consideration right now.
Stable sector
As a provider of residential property — and more specifically for adults with care and support needs — rental income and occupancy rates tend to be more stable than those of trusts operating in more cyclical sectors.
In addition, the rents it receives are effectively funded by local authorities, who pay housing benefit to approved providers who lease its properties. Changes to government funding could impact this favourable funding model. But I’m optimistic that this is unlikely given the huge savings that trusts like this provide the taxpayer.
According to Social Housing REIT,
Residents living in specialised Supported Housing cost the government about £200 less per week than being in a residential care home and nearly £2,000 less per week than remaining in in-patient care.
As a consequence, the trust estimates that its own portfolio saves the government around £71.6m each year.
With a large portfolio of properties, too — it has around 3,400 homes on its books across 500 supported housing properties — it’s well placed at group level to absorb any problems that might arise.
8.9% dividend yield
I don’t think these qualities are reflected in the cheapness of Social Housing REIT’s shares.
At 61.9p per share, the trust also trades at an 45.8% discount to its estimated NAV per share of 114.1p.
The investment trust also offers excellent value from a passive income perspective. Its forward dividend yield of 8.9% is one of the highest across the REIT asset class. To put that into context, the FTSE 100 average sits way back at 3.9%.
Social Housing REIT’s share price has been negatively impacted by higher interest rates in more recent years. This has depressed the value of its assets and driven up borrowing costs.
While it remains sensitive to future rate movements, I believe that — on balance — this investment trust is an attractive dividend payer to consider today.
