Could 4,692 shares in this quality REIT get me a £1,000-a-month secondary income?

Real Income‘s (NYSE:O) stock is incredibly popular with investors looking for a second income. And with monthly benefits and an outstanding track record, it’s easy to see why.

A dividend yield of 5.3% is also not to be taken lightly. But I think UK investors need to be a little more aware of some of the hidden costs that come with investing in this type of asset.

Honesty

Realty Income’s a real estate investment trust (REIT) that owns a portfolio of properties primarily in the retail sector. And the company’s theme is honesty.

The company focuses on securing long-term contracts with reliable tenants, which reduces the risk of non-payment of rent. Plus this triple-net lease means that incremental maintenance costs are limited.

Another downside to this is that it also limits the scope for raising rents, meaning Realty Income must buy and sell properties to grow. But this has been done very well in the past.

There is nothing wrong with focusing on sustainability first and foremost and the company has raised its dividend every quarter for over 25 years. Over time, that growth increases.

Assignments

Realty Income currently pays $0.27 (about 24p) per share in monthly dividends. At today’s exchange rates, it looks like the number of shares needed for a £1,000 per month second income is 4,692.

There is, however, a catch. As a UK investor, my earnings from US companies are subject to a 15% withholding tax (30% for investors who do not file a W-8BEN form). That means the actual number of shares I need to direct to £1,000 per month in shares is something like 5,536. And that’s an important difference from an investment perspective.

With the stock trading at $61 per share, that’s the difference between $286,212 (£213,556) and $337,696 (£251,971). In other words – I’ll need an extra £40,000 over time to cover those taxes.

Staying close to home

I am not in a position to make this type of investment right now. But this is the kind of calculation that UK investors should be doing when thinking about their long-term returns.

Dividends from US companies come with a 15% withholding tax and a Dividends and Dividends ISA cannot benefit you from this. And that kind of drag back is something to be taken seriously.

It’s also worth noting that a number of UK REITs are coming in at good yields at the moment. They usually don’t pay monthly dividends, but trade at low multiples. This is something that private equity investors have been looking to take advantage of for the past few years. But I think there are still other possibilities to consider.

Increasing returns

There’s a lot to like about Realty Income. In terms of income, it may be one of the best businesses available in the stock market right now.

Investing, however, is about more than finding good companies. Investors also need to think about valuation and how much of their expected return they will be able to keep.

That’s why I’m looking beyond Realty Income right now. I think there are attractive opportunities for UK investors to look closer to home.