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One penny stock that I think could help me achieve my goal of a second source of income is Residential Secure Income REIT (LSE: RESI).
Here's why you'd buy the stock the next time you have some cash to invest!
Affordable housing
Residential Secure Income is established as a real estate investment trust (REIT). Invest in socially affordable housing and rent it out to make money.
The appeal of REITs is that they must return 90% of profits to shareholders. This is one of the reasons why I already have positions in some REITs as I look to increase my passive income.
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Residential stocks have been falling recently. I believe this is due to macroeconomic volatility, which has hampered the real estate market. Over a 12 month period the shares are down 28% from 76p this time last year to 54p as I write.
The positives
Firstly, demand for social and affordable housing is currently through the roof. Demand is far outstripping supply. As the population ages and grows, this could remain the case for several more years. In addition to this, with high interest rates, entering the real estate market has never been more difficult, so the demand for rental properties is also increasing. This is all positive for Residencial and could help boost performance and profitability.
Next, a dividend yield of 7.6% is higher than the FTSE 100 and FTSE 250 averages of 3.8% and 1.9%. However, I am aware that dividends are never guaranteed.
Finally, Residencial released full-year results for the year ending September 30, 2023 in December. I thought they were positive, but there were signs that the economic outlook had impacted the company. Rental income grew by 6.1% and demand for its properties remained high.
Additionally, the company paid a final dividend of 5.16p, the same as last year, and also appears to be well covered when looking at its balance sheet. However, cash generation and net asset value fell slightly, the former due to rising costs and the latter due to the current difficult property market. Finally, the company's rent collection figures reached an astonishing 99%, which is impressive.
Risks and final reflections.
The residential sector could find growth more difficult to achieve. Rising costs for homebuilders mean fewer completions across the industry. This could mean fewer properties to buy and rent to make money.
Then, although the business appears to be in a good financial position, as is the case with most real estate companies, they often take out loans to aid growth and purchase assets. Paying off debt during times of higher rates can be risky as repayments could be higher. This could harm Residential's balance sheet and any payments.
Looking at Residential's current fundamentals, results, and future prospects, I believe it will continue to grow. Once macroeconomic volatility subsides, these stocks could really help increase my passive income.
