I believe a real estate investment trust (REIT) can boost my passive income stream and I already own shares in a few different ones as part of my portfolio. I like the look of Real Estate Investors (LSE:RLE) for my holdings. Here’s why.
What is a REIT?
A REIT is an investment trust specialising in property investment. By purchasing a share in one, I can access the property market without worrying about the costs of purchasing a property or the day to day worries of managing a single property or portfolio of properties.
Why are REITs good stocks to build a passive income stream? They must legally return 90% of profits to shareholders as dividends.
I must note there are risks involved in buying such shares. Economic conditions do affect rental income, which can hurt shareholder returns. A prime example of a crisis is the 2020 pandemic and market crash. REITs struggled to collect rent and were unable to turn a profit. This meant many were unable to payout dividends in 2020.
Midlands-focused REIT
Real Estate Investors was formed in 2004 and currently possesses a property portfolio worth £195m. It focuses on commercial and residential properties and has a geographical focus on the Birmingham and Midlands area.
RLE is currently a penny stock as the shares are trading for 39p. At this time last year, the shares were trading for 37p, which is a 5% increase over a 12-month period. It’s worth noting that the shares are still below pre-pandemic levels as they were trading for 56p in February 2020 before the stock market crash.
I can see prior to the pandemic that revenue and profit grew for two years between 2018 and 2019 but in 2020 it recorded a loss due to the effects of lockdowns. I understand that past performance is not a guarantee of the future, of course.
RLE started to recover in 2021. Full-year 2021 results released in March showed revenue only £0.4m less than 2020 levels. More tellingly, it reported a profit of £13.9m for 2021 compared to a £20.2m loss in 2020. It also reported it had £9.8m cash in the bank, which boosted the balance sheet. The overall dividend for 2021 was 3.0625p, which is up 2% from 2020 levels.
Risks and verdict
Now for the bad news. RLE does face credible headwinds currently. Soaring inflation and the cost of living crisis in the UK could impact rent collection. In turn, this could impact performance and any shareholder returns as well. I will keep a keen eye on performance in these uncertain times.
At current levels, RLE shares sport a juicy dividend yield of over 7.5%. The FTSE 100 average dividend yield is 3%-4%! The shares look good value for money too on a price-to-earnings (P/E) ratio of just 5 as well.
I’d buy Real Estate Investor shares, adding this REIT to my existing collection. I believe they will help boost my passive income stream and provide stable returns over the long term.