I think real estate investment trusts (REITs) are some of the best stocks out there to build a passive income.
Property stocks like these don’t usually provide the biggest dividend yields. Cyclical shares usually offer much better dividends (pound for pound) when times are good and profits balloon.
But investing for long-term income is about much more than looking for big yields today. I want shares that will pay decent dividends at all points of the economic cycle. I also desire companies that can regularly grow shareholder payouts to offset the impact of inflation on my wealth.
This is why I think REITs are top stocks to buy. Firstly, they have to pay at least 90% of yearly profits to shareholders in the form of dividends. Secondly, the value of real estate tends to rise solidly over time, giving these shares the chance to grow profits strongly.
And finally, these property stocks tend to lock down their tenants on long-term leases. This gives them reliable rental income and therefore the means to pay dividends regardless of broader economic conditions.
Age of Empire
Empiric Student Property (LSE: ESP) is one London-listed REIT I’d consider buying if I had some spare cash to invest. This stock concentrates on the student accommodation market, a sector that’s suffering from extreme supply shortages.
In fact, current shortages drove revenue occupancy at the firm to record highs of 98% for the 2022/23 academic year. Like-for-like rents at the REIT rose a chunky 5.1% year on year too. This offset the impact of rising costs on its profits.
The UK student accommodation market is rock solid. Domestic student numbers are strong and British universities have been attractive destinations for overseas graduates for decades. This provides earnings at the likes of Empiric with an added layer of protection.
Having said that, a change to immigration rules could put a significant dent in Empiric’s profits outlook. The Times reported last week that the government is considering banning foreign students from studying at non-elite universities.
Rock-bottom share price
But as things stand, I still find Empiric’s investment case highly appealing. And despite recent share price gains it remains especially cheap too.
City analysts think earnings here will rise 104% this year. They predict a 28% year-on-year rise in 2023 as well. Consequently the REIT trades on forward price-to-earnings growth (PEG) ratios of 0.3 and 0.7 for these two years.
Any reading below 1 suggests a stock is undervalued.
Impressive dividend growth
This bright profits outlook means Empiric Student Property is tipped to rapidly grow the dividend over the next two years.
Last year’s 2.5p per share reward is expected to rise to 2.6p in 2022 and then to increase to 3.6p in 2023. This pushes a handy 2.9% dividend yield for this year to a fatty 4% next year.
And I expect dividends here to keep growing over the long term as the business expands and profits balloon. Empiric encouragingly praised its “strong pipeline of potential acquisitions and development opportunities” in August.