Owning shares in real estate investment trusts (REITs) can be a great source of passive income for an investor like me. After buying the shares, I can collect monthly income in the form of dividends without having to do anything.
I think that buying shares in a REIT can be a tremendous investment opportunity. In fact, my largest single stock investment is in a REIT.
What are REITs?
REITs make their money by owning and operating real estate. This can include offices, shopping centres, warehouses, apartment buildings, and so on.
The rental income that REITs generate is exempt from tax. That’s the main benefit of becoming a registered REIT for someone who owns and rents out properties.
In exchange for preferential tax treatment, REITs are required to distribute 90% of the rental income they generate to shareholders. This takes the form of dividends.
By owning shares in a REIT, I can collect rental income from properties without having to do anything. I don’t have to find tenants, maintain properties, or manage contracts – just receive dividends.
REITs can be a great opportunity for investors like me to generate passive income using property. But there are also some disadvantages to REITs.
The most obvious disadvantage is that it’s difficult for REITs to achieve meaningful growth. This is because they have to finance their expansion using debt or by issuing shares.
Ordinarily, a business could attempt to expand by reinvesting its profits. But since REITs are required to distribute their income, this isn’t an option.
REITs, therefore, face a challenge that other businesses don’t. I see them as a steady, rather than spectacular, investment proposition for providing passive income.
At the moment, there are five REITs that I’m looking at buying.
The first two are Realty Income and Agree Realty. Both companies lease retail properties to tenants with strong credit ratings and have enviable occupancy rates and rent collection statistics.
Retail properties have been unpopular with investors due to the rise of e-commerce. But both Realty Income and Agree Realty concentrate on tenants in industries immune to this threat.
At current prices, Realty Income shares pay a 4% dividend. The dividend yield of Agree Realty’s stock is 3.5%.
The next two are Segro and Terreno Realty. These companies lease industrial properties, notably warehouses.
Unlike retail properties, warehouses have benefitted from the rise of e-commerce. As a result, both Segro and Terreno have been popular with investors.
The downside to this is that the dividend yields are a bit more modest. Segro’s dividend yield is 2.4% and Terreno Realty’s is 2.17%.
Lastly, I’m looking at SL Green Realty. This company leases office space, primarily in Manhattan.
Demand for office space has been declining and this has weighed on SL Green’s income. But the risk here is offset by a strong monthly dividend, with a current yield of 7.5%.
I’m currently watching each of these stocks closely. I’m always looking for ways to boost my passive income and I think that adding to my REIT portfolio might be a good way to do it.
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Stephen Wright has positions in Realty Income. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.