Stock market correction: a rare second income opportunity?

Stocks that can provide a reliable second income are often resilient in a market correction. But lower prices mean higher dividend yields. Volatile share prices have created some interesting opportunities for dividend investors. And some of these are in the FTSE 100. 

Real estate

Real estate investment trusts (REITs) can be great income stocks. Their businesses are some of the most straightforward around. Fundamentally, REITs own and lease properties. And they return the cash they generate to investors in the form of dividends.

There’s a lot to like about a simple business model. It makes the company relatively predictable and the risks easier to understand. The downside is that it’s harder to find overlooked opportunities. And that can make finding outstanding opportunities a challenge.

Quality properties in good locations usually benefit from strong demand. But this usually leads to high share prices and low dividend yields. Another approach is to look for high dividend yields. These can look attractive, but they often involve compromising on asset quality in some way.

A stock market correction though, can shake things up. REITs with attractive portfolios can offer unusually good returns.

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A quality business

LondonMetric Property (LSE:LMP) has a mixture of assets. These range from theme parks to urban distribution warehouses.

What impresses me most about the firm is the way it structures its leases. The average time to expiry varies from one to another. There’s a good reason for this. Long contracts bring reliable income, but they also impose limits on future growth potential.

As a result, LondonMetric’s most in-demand assets have shorter leases. This allows for more regular rent increases when contracts expire. This is a bold move and it can be risky. There’s always a possibility that increasing rents causes tenants to move out. 

Supply however, is naturally limited by the amount of available real estate close to urban areas. So this offers some support.

Growth potential

In general, it’s hard for REITs to expand. What they need for this is cash, but they have to pay this out to shareholders as dividends. As a result, acquiring new properties often involves merging with or buying other companies. And this is inevitably risky.

In general, businesses that do this more often tend to be better at it. Put simply, they have experience managing the process.

LondonMetric Property has been busy in recent years. And its management has created an attractive portfolio as a result of its recent deals. More importantly though, it’s establishing itself as a good acquirer of businesses. That’s a very valuable skill in the REIT sector. As a result, investors might well think this is one of the best businesses in the industry. And it has an unusually high dividend yield right now.

Dividend income

LondonMetric Property’s shares are currently trading with a dividend yield close to 7%. The average over the last five years has been closer to 4.5%.

The threat of higher interest rates might weigh on the share price in the short term. But for investors looking for income, I think the stock’s well worth considering.

The post Stock market correction: a rare second income opportunity? appeared first on The Motley Fool UK.

More reading

• How much do I need in a Stocks and Shares ISA to aim for a £900 monthly second income?
• How much will I need in an ISA to earn a £1,000 monthly passive income?
• How big does an ISA need to be to target a £10,000 monthly second income?
• 1 REIT I own for a lifetime of passive income!
• 3 top passive income stocks with yields above 5% to consider for a SIPP

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended LondonMetric Property Plc. 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.

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