Real estate investment trusts (REITs) are popular shares for investors seeking to upgrade their passive income.
Successful dividend investing of course involves more than looking for the biggest yields today. The key to growing long-term wealth is to find shares that can deliver large and increasing dividends year after year.
This is what can make REITs an ideal investment. So what exactly makes them so special? And which ones do I believe could significantly boost my own passive income?
Market-beating returns
REITS have been around on the London Stock Exchange for around 15 years. They’re companies that invest in property and are given certain tax advantages over conventional real estate businesses.
In exchange for this perk, they are required to distribute a minimum of 90% of annual profits to shareholders by way of dividends.
This quality makes them such a great choice for those seeking reliable dividend income. And it’s one that means they frequently offer much higher returns than other stocks.
Even Buffett’s bought in!
Take the FTSE NAREIT All Equity REIT Index, for example, whose constituents operate in the US. It has delivered an average annual return of 12.6% during the past 25 years. This is better than the 11.9% return the S&P 500 has provided in the same time.
No wonder some of the world’s most successful investors have dipped their toe in the REIT pond. One of these is billionaire stocks guru Warren Buffett. His Berkshire Hathaway investment firm has held shares in retail-focused STORE Capital for years now.
2 top REITS on my radar
REITs can provide steady dividend income to investors through their rental income. They can also offer long-term capital appreciation as the properties they own rise in value. But of course, there can be risks. The pandemic showed how property owners can sometimes struggle to collect rents. And property values can fall in tough economic times.
On the plus side, these real estate stocks may be effective ways that investors can protect themselves from today’s soaring inflation. This is because they could potentially pass on increased operating costs through higher rents charged to tenants.
There are currently more than 50 REITs traded in the UK. I already own warehouse and logistics hub specialist Tritax Big Box in my shares portfolio. And I’ve targeted more to add in the weeks and months ahead.
For example, I’m considering buying shares in medical centre provider Assura. Even though it’s vulnerable to changes in NHS funding, I think it could deliver exceptional long-term returns as Britain’s ageing population drives investment in healthcare infrastructure.
Big Yellow Group is another top REIT I’m looking at. The self-storage specialist could come under near-term pressure as consumer spending weakens. But I believe this sector still has room for exceptional growth in the years ahead, driven by phenomena such as increased downsizing from older homeowners, a buoyant residential rental market, and increased storage requirements from e-retailers.
REITs are, by and large, a cost-effective and often simpler way to make money from UK property. And I think they could be a highly-effective way for me to improve my long-term passive income.