Looking for income? Consider these high-yield real estate dividend investment trusts
Real estate investment trusts are the perfect instruments for investors seeking a secure income stream. These trusts invest in property assets and, due to restrictions placed on the REIT business model, return the majority of their income to investors via property income distributions, which are similar to dividends.
F&C UK Real Estate Investments(LSE: FCRE) is a great example. This business invests in commercial property around the UK and has generated steady returns for its investors since its IPO in 2004.
Slow and steady growth
According to F&C's results for six months to the end of December, which were published this morning, during the period under review net asset value grew by 7.4% and the annualised dividend yield averaged 4.8%. Over the past five years, the trust has generated returns for investors via both net asset value growth and dividend income.
For the five years to the end of September 2017, F&C's net asset value per share increased by 90% and the share price added 119% excluding dividends. The trust distributes its income every quarter and currently, the quarterly payout is 1.25p per unit.
There are some concerns about the impact Brexit will have on the UK property market, but to me it looks as if F&C is, to a certain extent, insulated from this uncertainty. It has a large portfolio of retail distribution assets, such as the Northfields Retail Park, Rotherham which "delivered the highest weighted contribution to portfolio return of any property over the period." As the demand for retail distribution assets continues to expand, led by the growth of online retailing, F&C and its investors should continue to profit, no matter what the Brexit outcome.
At the end of December, the trust's net asset value was 104.9p, so today the shares are trading at a slight (0.9p) discount to the value of F&C's property.
Another property business I'm positive on the outlook for is U and I Group (LSE: UAI). Not strictly a real estate investment trust, U and I is a property regeneration business where the returns are lumpier, but also more lucrative.
For fiscal 2018 management is targeting between £65m and £70m of property trading and development gains, a large percentage of which will be returned to investors. Analysts have pencilled in a dividend yield of 9.3% for the year, falling to 6.2% for fiscal 2019. As well as this market-beating dividend yield, the shares are also trading at a discount to tangible book value. Specifically, based on the most recent set of figures, the shares are trading at only 70% of tangible book value.
As the company works to realise value by disposing of its development property holdings, this discount should narrow, hinting at the prospect of attractive returns for investors.
To help the company meet its develop gains goal, today it announced that its contract to purchase the Preston Barracks site from Brighton & Hove City Council is now unconditional, which will allow it to deliver one of Brighton's biggest ever mixed-use regeneration projects producing 369 new and affordable homes as well as 1,338 purpose-built student bedrooms for the University of Brighton and an innovation hub for start-up and SME businesses. This is yet another development that shows management is working hard to unlock value for investors in the business.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.