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Real estate investment trusts (REITs) can be a great way to generate large and growing passive income in a stocks and shares ISA.
These real estate stocks are designed to provide dividends to investors. In exchange for corporate tax savings, they must distribute a minimum of 90% of annual rental profits in the form of cash rewards.
Please note that tax treatment depends on each client's individual circumstances and may be subject to change in the future. The content of this article is provided for informational purposes only. It is not intended to be, nor does it constitute, any type of tax advice.
Great benefits
This alone does not make them reliable or generous dividend providers. Like any UK share, the level of payouts to shareholders is very sensitive to profitability.
But REITs have qualities that can make them better dividend providers than most other stocks. Rentals are contracted and tenants are typically subject to long-term rental agreements. Lease contracts are also often linked to inflation, which can help these companies cope with rising costs.
Finally, many REITs operate in defensive sectors (such as healthcare and food retail). Some also operate in a variety of industries, providing them with stable profits throughout the economic cycle.
Home comforts
I already own several REITs in my own portfolio. And I'm creating a list of others to buy to increase my passive income in the New Year.
Grainger (LSE:GRI), the UK's largest listed residential landlord, is one such trust I am considering.
Although they have slowed recently, private rentals continue to increase at a strong pace. Newly let properties are now on average £270 more expensive than at the end of the pandemic, Zoopla research shows.
With the British population growing rapidly and buy-to-let investors selling in droves, the prospects for build-to-rent companies like Grainger look rock solid. This despite construction cost inflation remaining a threat to earnings growth.
On the downside, a forward yield of 3.6% is not the highest among UK REITs. However, its ultra-defensive qualities (rental income remains stable at all points in the economic cycle) and its growing market position still make it an attractive stock to consider buying.
Its development pipeline was 4,730 new homes in September.
Chance
Supermarket Income REIT (LSE:SUPR) is another important REIT on my radar today.
Like Grainger, it has a significant structural opportunity to exploit as Britain's population rises dramatically. More people means more mouths to feed and with it, the need for more grocery stores.
And like the residential homeowner, it has exceptional defensive qualities.
For one thing, it operates in a largely non-cyclical industry. It rents its properties to a number of major blue-chip supermarkets, including tesco, sainsburyWaitrose and Lidl, providing diversification across the premium, mid-tier and discount sub-sectors of the industry.
As an investor, I am also encouraged by plans to increase profits through international expansion. In April it acquired a portfolio of 17 Carrefour stores, marking its first foray into the French market.
Expanding through acquisitions like this exposes investors to additional risk. But all things considered, I think the REIT, which generates a great forward dividend yield of 8.8%, is an impressive passive income stock.
In my opinion, investors looking for passive income should consider Supermarket Income and Grainger for their own portfolios.
