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Owning shares in profitable companies can be a great source of passive income. And the requirement that real estate investment trusts (REITs) distribute their earnings as dividends makes them especially attractive.
Rising interest rates have caused the share prices of several REITs to fall, leading to higher dividend yields. But after the rally of recent months, should investors look elsewhere?
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REITs
Rising interest rates have been a headwind for real estate prices in 2023. But not all real estate stocks have been affected in the same way: companies have seen contrasting results across sectors and geographies.
Perhaps not surprisingly, in a year where ai emerged as a dominant investment theme, data center REITs have fared well. Trust in digital real estateFor example, it has seen its share price increase by around 30%.
On the other hand, the actions of Regional REITs They have fallen by around 50% as office owners have struggled across the board. This is because remote work continues to weigh on demand for office space.
One of the most interesting sectors is warehouses. In the United Kingdom, the shares of Warehouse REIT have fallen more than 20%, while their American counterpart Foreword has seen its share price increase by 3.5%.
In short, there could be stocks to buy in the REIT sector, even after a rally toward the end of the year. But it pays to compare prices and take a detailed approach, rather than looking at the sector as a whole.
What else looks cheap?
The stabilization of interest rates has been good for REITs. But they have been bad for defensive consumer stocks, which are less attractive when economic conditions are conducive to growth.
Unilever, for example, has seen its share price fall by around 4% over the last month. This is because the company has reached the limit of its ability to overcome inflation without reducing sales volumes.
As with REITs, different stocks have had quite different fortunes. discount retailer costcoFor example, it has seen its stock price rise 5% over the past month as consumers price down.
In some cases, specific considerations have been weighing on stocks. British American TobaccoFor example, it has seen its share price fall by around 9% due to the prospect of a UK smoking ban.
Where stock prices have been falling, dividend yields have been rising. I think this makes the sector a good place to look, but as with REITs, I would look to be selective in terms of which stocks to buy right now.
Passive income 2024
With both REITs and consumer defensive measures, it seems to me that there are investment opportunities that can begin to provide investors with passive income next year. But in both cases I think it pays to be selective.
In terms of the property market, warehouses and industrial distribution are a sector that UK investors should consider carefully. With the wind behind e-commerce, stocks of companies in this industry seem attractive to me.
Within the consumer defensive space, I think the opportunities are in stocks that have fallen out of favor as interest rates stabilize. Rising dividend yields could make them attractive into 2024 and beyond.
