Home comforts

I believe real estate investment trusts (or REITs) are great ways to build long-term passive income.

They must pay dividends on a minimum of 90% of their annual profits, according to regulations.

The regular rental incomes they receive give them the ammunition to pay out reliable dividends, too. This is critical for those seeking a dependable second income.

The PRS REIT (LSE: PRSR) is one such share I’m considering buying as residential rents soar. The property stock builds and rents out family homes across the UK. And it is expanding its portfolio to make the most of strong market conditions.

The business is looking to build its portfolio from 4,786 homes as of June to 5,600.

Revenues at PRS rocketed 58% in the 12 months to June, a result that drove pre-tax profit 163% higher.

I’m expecting the company’s profits to continue soaring as Britain’s shortage of rental homes worsens. A massive 227,000 new rental homes are needed each year to meet demand, says consultancy Capital Economics.

I’m concerned about the impact of rising construction costs on the REIT’s profits. But I believe that the potential rewards of owning this property share overwhelmingly outweigh this risk.

Today PRS carries a decent 4.8% forward dividend yield. It also trades on a corresponding price-to-earnings growth (PEG) ratio of 0.5. Stocks with readings below 1 are considered undervalued.

9.4% dividend yield!

I’m also considering buying Glencore (LSE: GLEN) shares to boost my long-term dividend income.

The FTSE 100 mining stock faces extreme near-term uncertainty as the global economy cools. The prices of the raw materials it produces and trades might sink if demand slumps.

Pleasingly, however, the projected dividend for 2022 is well covered by anticipated earnings. So even if Glencore earns less than brokers expect there’s a wide margin of safety for investors.

Dividend coverage sits at 2.9 times for this year. A figure of above 2 times is the target for share pickers.

As a long-term investor, I’m more interested in what dividends Glencore will provide beyond 2022. And it’s my opinion that the future is bright as the next ‘commodities supercycle’ drives profits.

Physical consumption of raw materials looks set to soar on the back of trends like rising urbanisation in emerging markets and huge global investment in green technologies.

A decline in the US dollar is also expected to boost commodity demand. This will essentially make it cheaper to buy dollar-denominated assets. There’s also the fact that commodities look dirt-cheap right now.

Glencore’s current share price carries a 9.4% dividend yield. It also trades on a price-to-earnings (P/E) ratio of just 3.7 times.

This all-round value makes it — like the PRS REIT — a top stock to boost passive income.

Rental properties

As a quick introduction, PRS is a REIT that focuses on providing quality rental homes for consumers in the private rental market. PRS was the first of its kind to target the rental market as an investment trust.

So what’s happening with PRS shares currently? Well, as I write, they’re trading for 100p. At this time last year, the stock was trading for 102p, which is a decline of 2% over a 12-month period. Recent macroeconomic headwinds have put pressure on the shares and stopped them from climbing, in my opinion.

Risks to consider

I have two main concerns with PRS. Firstly, it builds its own properties. Due to soaring inflation, the rising cost of materials, and the supply chain crisis, this could hinder performance and returns. Many house builders are contending with these challenges. Rising costs put pressure on profitability. Furthermore, the supply chain crisis is affecting completion dates and sales, or rentals, in PRS’ case.

Next, as with any stock I buy to boost my passive income stream, I must remember that dividends are never guaranteed. They can be cancelled at the discretion of the business at any time to help conserve cash. In times of economic volatility, like now, this is more likely.

The bull case and what I’m doing now

So let’s take a look at some positives then. First off, I’m buoyed by PRS’ performance track record. I am aware that past performance is no guarantee of the future. However, looking back, I can see it has grown revenue and profit year on year for the past four years.

Next, I believe PRS could benefit from the current housing market in the UK. To provide some context, the demand for homes is outstripping supply. Due to this, as well as the tougher conditions to obtain a mortgage, many consumers turn to the rental sector. PRS could experience a surge in demand for its properties. In turn, this could boost performance and level of returns for potential investors like me.

For any stock that is designed to reward shareholders, I want to know what the dividend yield is. At current levels, PRS’ yield of 4% is enticing. This is in line with the FTSE 100 average yield of 3%-4%.

Finally, I can see that PRS shares also look decent value for money currently on a price-to-earnings ratio of just eight.

In conclusion, I believe PRS REIT is in a great position to boost my holdings. It operates in a burgeoning market with favourable conditions. Furthermore, the passive income opportunity is enticing. I plan on adding PRS shares to the other REITs in my portfolio.

I like property stocks because they can raise rents to offset the impact of soaring inflation. This can give them added strength to pay dividends in tough times like these.

And I like REITs in particular for rich income streams. This is because they have to pay 90% of annual profits out by way of dividends.

Here are two top REITs I think will deliver a healthy second income for many years.

Safe as houses

The PRS REIT (LSE: PRSR) invests in residential rental accommodation. More specifically, it’s dedicated to providing family homes across the UK. This is a part of the market where rent growth is particularly strong.

There simply aren’t enough rental homes to go around. It’s why landlord services provider HomeLet reports that the average rent for all properties soared to new record highs of £1,143 per month in August.

This was up 1.4% from the previous month and a staggering 8.5% from August last year.

The PRS REIT latest financials illustrated this acceleration in rental income. Like-for-like rents on stabilised sites were up 5.1% in the 12 months to June, it said. Rents rose by a more modest 4.8% in the year to March.

It’s my belief that the market’s supply-and-demand imbalance will get worse before it gets better. And so rents should keep shooting higher. Housebuilding activity in the UK remains weak. Meanwhile, the exodus of buy-to-let investors is increasing as landlord costs stomp higher.

An ultra-competitive mortgage industry is a threat to this REIT. This, along with government support for first-time buyers, is helping people to leave the rental sector. But all things considered, I think the trading landscape remains highly favourable.

The PRS REIT carries a 4.1% dividend yield for the current financial year (to June 2023).

Another top-class REIT

A strong housing market bodes well for self-storage companies like Safestore Holdings (LSE: SAFE). Movers can need extra storage for several reasons, from needing to de-clutter before switching houses to keeping things in boxes whilst they decorate.

According to Cushman and Wakefield, average rental rates have risen 9% over the past year. They now sit at record highs of £29.13 per square foot.

Like the PRS REIT, Safestore is operating in a market where supply is failing to keep up with demand. That real estate report showed that 2,050 self-storage facilities are in existence today, up just 2.65% year on year.

This is why Safestore’s latest financials showed revenues and underlying earnings up 14.6% and 19.9% respectively between November and April.

Now Safestore doesn’t have the biggest dividend yield out there. This sits at 2.7% for the financial year to October 2022.

However, I think this REIT is a great bet for those seeking spectacular income growth. The annual payout here has leapt 115% during the past six years. I’d buy the business even though falling consumer confidence poses a near-term risk.

There will always be a risk that the companies in question could reduce their payouts to investors. If profits fall, or interest costs rise significantly, these businesses may have to hold back more cash to cover costs. Shareholders may be the first to feel the pain in any adverse scenario. 

Still, I believe some companies have more dependable dividends and others. Here are two REITs that fit my model. 

Passive income champions

Income from property can be more predictable than from other assets. This is especially true when landlords and tenants have agreed on a long-term contract. 

Secure Income REIT (LSE: SIR) has developed a business around this principle. The company has acquired a portfolio of properties that have long-term contracts. These tend to be unique and specialist assets, such as theme parks, supermarkets and care homes. 

These unique assets are let to highly liquid and financially stable tenants. Contracts are also usually tied to inflation. This combination of factors suggests the stock has a much more predictable and stable income outlook than other investments.

Unfortunately, even these qualities do not exempt the company from the powerful economic cycle. A sudden downturn in property prices, increasing interest rates or rise in corporate defaults, could all impact the value of its property portfolio and tenant income. 

Despite these challenges, I would acquire Secure for my passive income portfolio for its 3.5% dividend yield. 

Rental property 

The PRS REIT (LSE: PRSR) is building a portfolio of private rental properties across the UK. The company’s ambition is to develop more than 5,000 properties and generate a revolution in the buy-to-let market. 

PRS is building high-quality properties in large estates, which it offers on multi-year contracts. These assets are particularly appealing for renters and the company. New buildings have lower maintenance costs and are more appealing for renters. The multi-year contracts guarantee an annual income and attractive return on investment. 

The most considerable risk to this business model is the threat of regulation. Additional regulations, such as a rent cap or additional legal requirements for landlords, could increase costs and reduce returns. The group may have to sell its properties to other investors in the worst-case scenario if returns fall significantly. 

Still, thanks to its focus on the private rental market, rent collection has remained strong throughout the pandemic. This has supported the group’s dividend yield, which stands at 3.8%. 

With more developments planned, it looks as if the company has the potential to increase its dividend steadily over the next few years. On that basis, I would acquire the stock for my portfolio. 

A near-penny stock with HUGE dividends

There are a number of ways in which UK share investors can capitalise on the UK’s rapidly-growing elderly population. One way I’d do this is to buy XPS Pensions Group (LSE: XPS) which trades at 139p. The Office for National Statistics thinks one in four citizens will be aged 65 and above by 2050. That compares with one in five in 2019.

I expect XPS Pensions — the biggest pensions consultancy in Britain — to exploit this demographic opportunity to its fullest. I also like this particular company because of its commitment to expansion. In December, it agreed to acquire industry peer Michael J Fox for a fee of up to £3.75m.

I think XPS Pensions is an especially good buy because of its dividend prospects. Its defensive operations mean it should have the confidence and the financial clout to pay big dividends year after year. Indeed, its yield for the two financial years to March 2022 and 2023 sit at 4.8% and 5.2% respectively.

I’d buy the company even though its thirst for acquisitions could come back to bite it, for example if an asset throws up unexpected costs or delivers underwhelming revenues.

Building for growth

A worsening shortage of residential rental properties is encouraging me to invest in The PRS REIT (LSE: PRSR) too. Rents on family homes are booming as demand outstrips supply. In the last financial year (to June 2021) this UK share was able to increase rental rates on re-let properties by 6.2% and to existing tenants by 4%.

This massive market imbalance saw rents in the UK rise at their fastest rate since 2008 in the third quarter of last year, according to Zoopla. The property listings giant thinks tenant costs will continue rising strongly and has forecast average growth of 4.5% in 2022.

It’ll take a long time for this rapid uptrend to moderate, given the massive amount of residential properties required. And in the meantime, PRS is supercharging its own production plans to make the most of the opportunity.

In December, it acquired three of five targeted sites on which it plans to build 383 new units. The business recently hiked its portfolio target to 5,700 homes from 5,200 previously.

Now PRS doesn’t come cheap. At current prices of 106p, the property firm trades on a forward P/E ratio of 29.5 times. This sort of valuation could cause its share price to drop sharply if it encounters problems, for example if building material prices continue to soar.

However, I believe the bright market outlook makes this ‘almost’ penny stock worthy of a handsome premium like this. Besides, a meaty 3.8% dividend yield helps to take the edge off The PRS REIT’s elevated earnings multiple.

Passive income seekers heaven

Investors often look at buy to let opportunities to access the property market. A real estate investment trust (REIT) is a company that owns and operates income-producing real estate. One of the main rules a REIT must follow is that 90% of its tax-exempt property income profit must be distributed to investors as dividends.

PRS is the UK’s first quoted REIT to focus on newly built family homes for the private rental market. It aims to enhance the rental experience for consumers and provide them with new, quality homes. As I write, PRS shares are trading for 106p, whereas a year ago shares were trading for 75p. This is a 41% return over a 12-month period.

Why I like PRS

I like PRS first because the current housing and house building market is booming. The demand for new houses is outstripping supply and housebuilders are working as hard as possible to build them. Buyers are on the lookout for new homes to buy and live in, but due to rising costs, most turn to renting. PRS can benefit from both of these favourable market conditions. It builds its own houses and then manages renting them to consumers.

I like the idea of building up a buy to let portfolio as an investment vehicle but this can be costly and time consuming. A REIT like PRS can help me make a passive income without thousands of pounds of outlay and time spent managing tenants and properties. In addition to this, buying a REIT means I avoid double taxation compared to a regular dividend stock. Other firms are liable for corporation tax and my dividend received would be taxable too. If I had a buy to let, my rental income would be liable for tax as well. REITs receive a corporate tax exemption for rental income. This means the net rental income can pass through to me, the investor, as a dividend.

Finally, PRS continues its upward growth trajectory. This was signified by an announcement confirming the purchase of a new site for a new project today. Furthermore, PRS looks cheap at current levels. It has a price-to-earnings ratio of just over 11 and a dividend yield close to 5%.

Risks involved

Current macroeconomic pressures such as rising inflation and rising costs of materials will impact house builders. A REIT like PRS could be affected as it builds its own properties. These costs, if not passed to the customers, could affect performance and any passive income I am looking to make. Also, the shares are trading close to all-time highs, meaning any negative news could knock investor sentiment and pose a risk to returns.

Overall, I believe PRS is an excellent opportunity for me to access the property market, and let somebody else manage the hassle of the properties involved. At current levels, it is cheap and has an enticing dividend yield. I would add the shares to my holdings now to make a passive income.

Low-cost UK shares can often experience extreme share price volatility, though this doesn’t put me off. This is because I buy stocks with a view to holding them for the long haul, say a decade or more. History shows us that, over this sort of timescale the cream usually rises to the top. I can be confident that, with the right research, the shares I buy will rise over a period of years. That’s irrespective of what I paid for them in the first place.

Here are three top, cheap UK shares I’d buy to hold all the way to 2030. They all cost less than a £2.40 cup of coffee from your usual high street chain, too.

A cheap UK share for the gaming boom

You might think that the video games industry peaked last year as Covid-19 lockdowns boosted software sales. If that’s the case you’re likely to be proved wrong. Research firm Global Industry Analysts for one expects the global games market to top $293bn by 2027. That represents annualised growth of 9.3% between 2020 and then.

I think buying tinyBuild (LSE: TBLD) shares is a good way for me to play this theme. This UK tech share has published 40 games across PC, consoles, and even mobiles. And it has almost 30 more titles in development with which to exploit the gaming boom. I am aware, though, that games development is an extremely tough business, and problems on this front can play havoc with a company’s profits.

The colossal problems that developer CD Projekt is still having with Cyberpunk 2077 almost a year after launch is evidence of this. I’m not suggesting that tinyBuild is about to suffer similar misfortunes. But its big valuation means that its share price might fall if such issues appear. Today this UK share’s forward P/E ratio sits above 42 times.

A top penny stock

I think grabbing a slice of the residential property rentals market is a great, lower-risk idea. Rents are heading though the roof (no pun intended) because of a severe shortage of available homes. According to Zoopla, tenant costs jumped 4.6% year-on-year in September. This was the biggest jump seen since 2008.

I’d buy The PRS REIT (LSE: PRSR) to ride this theme, a real estate share that falls inside penny stock territory at 97p. This is even though the cost of building its homes could continue spiralling higher if material shortages persist. It will take many years for the drought of rental homes to be cured in Britain, meaning that this share can look forward to strong and sustained profits growth.

Today, PRS REIT trades on a rock-bottom forward P/E ratio of 8.3 times. This, combined with its 5.2% dividend yield makes it excellent value for money in my book.

Building big returns with residential property

Once upon a time I considered buy-to-let to be a great way to invest cash. It’s not a view I still subscribe to however.

Don’t get me wrong. I believe getting a slice of the property rentals sector remains a good idea. Home prices in the UK continue to soar. And thanks to a chronic shortage of available rental properties, the amount landlords can charge is rising sharply. However, I’m giving buy-to-let a miss because the costs and the paperwork that landlords now face have exploded in recent years.

This is why I’d buy PRS REIT (LSE: PRSR) to grab a piece of the action instead. This penny stock invests in newbuild family homes and, as of September, had a whopping 4,291 homes on its books. The company has recently raised cash via a share placing to keep growing its portfolio too. It is aiming to have 5,700 rental homes by the end of this fiscal year.

These targets could fall by the wayside if well-publicised building product shortages hit production rates. These current supply problems could also push costs much higher. Still, I think PRS REIT is a great — and importantly — simple way to play what I expect to remain a highly lucrative market.

Oh, and one final thing. The former penny stock’s status as a real estate investment trust (REIT) means it’s obliged to pay nine-tenths of annual profits to shareholders by way of dividends. This means investors like me can realistically expect to receive fatty dividends year after year. Indeed, the dividend yield here sits at a market-beating 4% for the current fiscal period.

A cheap UK share for the green revolution

Sylvania Platinum’s (LSE: SLP) a cheap UK mining share I’m thinking of snapping up right now. I think it could prove to be a great way to play the green revolution too. This is because the platinum group metals (PGMs) it produces are essential in the production of autocatalysts. Here, they are being deployed in increasing amounts to reduce emissions.

I also like this South African metals producer because it gives me the chance to exploit the bright precious metals price outlook. I expect demand for safe-haven assets like PGMs to remain strong as inflationary pressures increase, the Covid-19 crisis drags on, and tensions between major economies and trading blocs (like the US and China) intensify.

Profits at Sylvania Platinum could disappoint if the complex nature of its operations experience problems. But, all things considered, I think this is another attractive UK bargain share for me to buy today.

Battered buy-to-let

Buy-to-let used to be a lucrative investment class for UK investors. An ever-shrinking stock of family houses meant rents kept going up and up. Meanwhile, property prices ballooned, thanks to low interest rates and government support for first-time buyers. This allowed landlords to sell up for a fortune later down the line.

However, buy-to-let returns have taken a pasting in recent years, due to a raft of legislative changes. Amendments to tax rules, such as the end to tax relief on buy-to-let mortgage interest, have seriously whacked landlord profits.

Then the Tenant Fees Act transferred a raft of fixed costs from the tenant onto the shoulders of the property owner. Maintenance and regulation costs have also charged higher over the past few years.

At the same time though, rents have continued moving higher. A recent survey from HomeLet showed the average rent for a new tenancy in the UK rose to £1,029 per calendar month in July. That’s up a meaty 6.6% year-on-year. There’s still a chance to make decent money from the British property rentals market then. And I’d do this by snapping up ‘nearly’ penny stock PRS REIT (LSE: PRSR).

Why I’d buy this UK share

This UK share isn’t subject to the same profits-sapping crush as buy-to-let landlords. And what’s more, PRS REIT has the financial clout to make the most of this market through rapid expansion. The business just completed the construction of its 4,000th rental home. And it has roughly another 1,100 in the works.

As with all UK shares, this former penny stock isn’t without risk, of course. Possibly its most pressing problem is a shortage of building materials that could delay its construction plans and push up costs. It could also suffer significant worker shortages following the change to immigration rules post-Brexit.

According to the Office for National Statistics, the number of EU workers working on UK construction sites tanked 42% in 2020. This compares with the 4% drop among British-born workers.

A dirt-cheap ‘almost’ penny stock!

Still, at recent prices of 106p per share, I think PRS REIT could be considered too cheap to miss. City analysts think annual earnings here will rocket more than 220% in this fiscal year (to June 2022). This leaves the ‘almost’ penny stock trading on a forward price-to-earnings growth (PEG) ratio of 0.1. A reading below 1 suggests a stock could be undervalued by market makers.

In addition to this, at current prices, PRS REIT carries a 4% dividend yield for fiscal 2022. Compare this to the 3.1% average which the broader FTSE 100 currently boasts. All things considered, I think this is a top UK value stock for me to buy today and hold for years to come.

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.