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Real estate investment trusts (or REITs) can be an incredible way to make passive income over time. These property stocks are unique in that they pay 90% or more of rental profits out in dividends each year. That’s in exchange for breaks on corporation tax.
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.
Here I’d like to talk about three top trusts in particular: Tritax Big Box (LSE:BBOX), Social Housing REIT (LSE:SOHO) and Supermarket Income REIT (LSE:SUPR). With forward dividend yields of 5.6% and above, they certainly offer better dividend potential in the near term than most FTSE 100 shares.
Read on to discover why they’re top stocks to consider.
Top trio
Each of these shares enjoys unique advantages that make them ideal for long-term passive income. For Tritax Big Box, these include:
- A diversified portfolio of almost 700 assets.
- Exposure to long-term growth markets like e-commerce.
- A high-quality tenant base like Amazon, Tesco and Iron Mountain.
- Low debts (its loan-to-value sits below 33%).
Social Housing REIT has various qualities of its own, including:
- A focus on the ultra-defensive specialised supported social housing (SSH) market.
- Low property vacancy risks due to housing demand exceeding supply.
- Its tenants are housing associations or councils, meaning rents are underpinned by social care budgets.
- 100% of its contracts are inflation linked.
Food for thought
Meanwhile, Supermarket Income REIT benefits from:
- Its commitment to the largely recession-proof food retail sector.
- A string of blue-chip supermarkets including Tesco, Sainsbury’s, Waitrose and Aldi on its books.
- A portfolio that includes omnichannel stores, reducing the risk from online grocery.
- Exposure to a structural growth market as the UK population rapidly increases.
So how do these qualities translate into dividend forecasts for these REITs’ current financial years? Let’s take a look:
| Dividend share | Years of unbroken dividend growth | Forward dividend yield |
|---|---|---|
| Tritax Big Box | 5 | 5.6% |
| Social Housing REIT | 1 | 7.8% |
| Supermarket Income REIT | 7 | 7.4% |
As you can see, yields are least almost double the current FTSE 100 average of 3%. Social Housing has never cut its annual dividends either, while Supermarket Income has raised them every year since it listed on London’s stock market in 2019.
So what next?
However, past performance isn’t a guarantee of future returns. And dividends at each of these REITs could be impacted by rising interest rates that drive up borrowing costs.
These businesses could also run into more specific problems. A recession might cause occupancy to fall at some of Tritax’s logistics sites. Changes to supported housing funding could impact Social Housing REIT’s earnings and dividends. And Supermarket Income could suffer if online grocery shopping accelerates.
However, any passive income share an investor buys comes with risk. And on balance, I think these REITs have the tools to keep delivering market-beating dividends over the long term.
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