2020 was a difficult year for income investors as hundreds of UK shares cut, cancelled or postponed their dividends. Even some of the traditionally best dividend stocks to buy like Royal Dutch Shell — a firm that hadn’t reduced dividends since the end of World War 2 — were forced to slash shareholder payouts in response to the Covid-19 crisis.
It might take some time before total dividends from UK shares grow strongly again. But this isn’t stopping me from shopping for income stocks. There are plenty of top UK dividend shares on course to pay big dividends from 2021 onwards.
Safe as houses
I certainly think that The PRS REIT (LSE: PRSR) is of the best dividend stocks to buy right now. As a supplier of residential rental properties it operates in one of the most robust parts of the property market. That’s even though a recent report by Nationwide showed that the private rented sector contracted for the third year in a row in 2020. The proportion of British households renting privately dropped to 18.7%, down from 19.3% the year before.
It’s a trend that illustrates the impact low interest rates, government purchase incentives and generous mortgage products are having in boosting house sales to first-time buyers. It looks like these favourable buying conditions are set to persist too. And this could lead to falling demand for The PRS REIT’s rental properties.
That said, the drop Nationwide mentions also reflects the exodus of private landlords in recent years. The number of buy-to-let operators has slumped due to increased regulation and tax changes, developments that have taken a huge bite out investor profits. This reduction in the quantity of available rental properties is actually playing into the hands of the likes of The PRS REIT as it feeds through to increased rents.
One of the best dividend stocks to buy
It’s true that UK property shares like The PRS REIT are attuned to conditions in the broader housing market. And this has the potential to hit profits if the broader economy takes a hit. But past form shows that such a scenario could actually have a negligible effect on rent levels. Property investment group SevenCapital says that average rents in the UK fell just 2% during the 2009 financial crisis. That compares with the 18% fall in average house prices.
Under real estate investment trust (or REIT) rules, this UK share is obliged to pay at least 90% of annual earnings to shareholders in the form of dividends. This obviously bodes well for investors given the rental market’s bright outlook and The PRS REIT’s attempts to exploit it to the fullest with its ambitious construction targets. Today the company sports 4.2% and 4.5% dividend yields for the financial years to June 2021 and 2022 respectively. Its big yields and excellent earnings visibility makes The PRS REIT one of the best dividend stocks out there, in my opinion.