I have been looking for dividend shares that could provide a dependable passive income for my portfolio. I say dependable and not guaranteed because dividend income from shares is never a sure thing.
There will always be a risk that the companies in question could reduce their payouts to investors. If profits fall, or interest costs rise significantly, these businesses may have to hold back more cash to cover costs. Shareholders may be the first to feel the pain in any adverse scenario.
Still, I believe some companies have more dependable dividends and others. Here are two REITs that fit my model.
Passive income champions
Income from property can be more predictable than from other assets. This is especially true when landlords and tenants have agreed on a long-term contract.
Secure Income REIT (LSE: SIR) has developed a business around this principle. The company has acquired a portfolio of properties that have long-term contracts. These tend to be unique and specialist assets, such as theme parks, supermarkets and care homes.
These unique assets are let to highly liquid and financially stable tenants. Contracts are also usually tied to inflation. This combination of factors suggests the stock has a much more predictable and stable income outlook than other investments.
Unfortunately, even these qualities do not exempt the company from the powerful economic cycle. A sudden downturn in property prices, increasing interest rates or rise in corporate defaults, could all impact the value of its property portfolio and tenant income.
Despite these challenges, I would acquire Secure for my passive income portfolio for its 3.5% dividend yield.
Rental property
The PRS REIT (LSE: PRSR) is building a portfolio of private rental properties across the UK. The company’s ambition is to develop more than 5,000 properties and generate a revolution in the buy-to-let market.
PRS is building high-quality properties in large estates, which it offers on multi-year contracts. These assets are particularly appealing for renters and the company. New buildings have lower maintenance costs and are more appealing for renters. The multi-year contracts guarantee an annual income and attractive return on investment.
The most considerable risk to this business model is the threat of regulation. Additional regulations, such as a rent cap or additional legal requirements for landlords, could increase costs and reduce returns. The group may have to sell its properties to other investors in the worst-case scenario if returns fall significantly.
Still, thanks to its focus on the private rental market, rent collection has remained strong throughout the pandemic. This has supported the group’s dividend yield, which stands at 3.8%.
With more developments planned, it looks as if the company has the potential to increase its dividend steadily over the next few years. On that basis, I would acquire the stock for my portfolio.
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Rupert Hargreaves has no position in any of the shares 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.
