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Stocks that can provide a reliable second income are generally resilient to market corrections. But lower rates mean higher dividend yields. Volatile stock prices have created exciting opportunities for diversification investors. And some of these are inside FTSE 100.
Real estate
Real estate investment trusts (REITs) can be good income stocks. Their businesses are some of the most straightforward around. Basically, REITs own properties and rent them out. And they return the money they generate to investors in the form of dividends.
There’s a lot to like about the simple business model. It makes the company relatively predictable and easier to understand risks. The downside is that it’s hard to find missed opportunities. And that can make finding outstanding opportunities a challenge.
Quality properties in prime locations often benefit from strong demand. But this often leads to high share prices and low dividend yields. Another way is to look for a high dividend yield. These may look attractive, but usually involve compromising the quality of the material in some way.
Stock market corrections, however, can shake things up. REITs with attractive portfolios can offer unusually good returns.
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Classy business
LondonMetric Property (LSE:LMP) has a mix of assets. These range from theme parks to urban distribution centers.
What impresses me most about this company is the way it structures leases. The average expiration time varies from person to person. There is a good reason for this. Long contracts bring reliable income, but also limit future growth potential.
As a result, LondonMetric’s most sought-after properties have short leases. This allows for regular rent increases when contracts expire. This is a bold move and can be dangerous. There is always the possibility that rent increases will force tenants out.
Supply however, is naturally limited by the amount of real estate available near urban areas. So this gives some support.
Growth potential
In general, it is difficult for REITs to grow. What they need for this is cash, but they have to pay it out to shareholders as dividends. As a result, acquiring new properties often involves merging or buying other companies. And this is definitely dangerous.
In general, businesses that do this tend to be better at it. Simply put, they have experience managing the process.
LondonMetric Property has been busy in recent years. And its management has created an attractive portfolio thanks to its recent deals. More importantly, it establishes itself as a good business benefactor. That is a very valuable skill in the REIT sector. As a result, investors may think that this is one of the best businesses in the industry. It also has an unusually high dividend yield right now.
Budget money
LondonMetric Property shares pay a dividend of 7%. The average over the past five years has been close to 4.5%.
The threat of higher interest rates may weigh on share prices in the short term. But for investors looking for income, I think the stock is worth considering.
