Income

Why I buy REITs to increase my passive income!

Image source: Getty Images

Real estate investment trusts (REITs) are popular stocks for investors looking to increase their passive income.

Successful dividend investing of course involves more than chasing the highest yields today. The key to long-term wealth growth is finding stocks that can pay large and growing dividends year after year.

This can make REITs an ideal investment. So what makes them so special? And which ones do I think could significantly increase my own passive income?

Above-market returns

REITs have been around since London Stock Exchange for about 15 years. These are companies that invest in real estate and benefit from certain tax advantages compared to conventional real estate companies.

In return for this benefit, they are required to distribute a minimum of 90% of annual profits to shareholders in the form of dividends.

This quality makes it an excellent choice for those looking for reliable dividend income. And that’s one that means they often offer much higher returns than other stocks.

Even Buffett bought!

Take the FTSE NAREIT All Equity REIT Index, for example, whose voters operate in the United States. It has generated an average annual return of 12.6% over the past 25 years. This is better than the 11.9% yield S&P500 provided at the same time.

No wonder some of the world’s most successful investors have dipped their toe in the REIT pond. One of them is billionaire stock guru Warren Buffett. His Berkshire Hathaway investment company held shares in retail-focused companies STORE Capital for years now.

2 best REITs on my radar

REITs can provide stable dividend income to investors through their rental income. They can also offer long-term capital appreciation as the value of the properties they own increase. But of course, there can be risks. The pandemic has shown how landlords can sometimes struggle to collect rent. And property values ​​can drop in tough economic times.

On the positive side, these real estate stocks can be effective ways for investors to hedge against the current inflation spike. Indeed, they could potentially pass on increased operating costs through higher rents charged to tenants.

There are currently over 50 REITs trading in the UK. I already have a warehouse and logistics hub specialist Tritax Big Box in my stock portfolio. And I’ve targeted more to add in the weeks and months to come.

For example, I am considering buying stock in a medical center supplier Assura. While vulnerable to changes in NHS funding, I believe it could offer exceptional long-term returns as Britain’s aging population drives investment in healthcare infrastructure.

Large Yellow Group is another top REIT I look at. The self-storage specialist could come under pressure in the near term as consumer spending weakens. But I think this sector still has exceptional room for growth in the years to come, driven by phenomena such as the increased downsizing of older owners, a dynamic residential rental market and increased storage needs of e-tailers.

REITs are, overall, a cost-effective and often easier way to make money from UK property. And I think they could be a very effective way for me to improve my long-term passive income.