I like searching for great penny stocks to buy. It gives me a chance to find the growth heroes of tomorrow and to pick them up for little cost. Here’s a cheap UK share I think could provide terrific returns now and in the years ahead.
Home comforts
Residential rents in the UK continue to rise at an eye-popping rate. According to Rightmove the average asking rent leapt 9.9% year-on-year in the final quarter of 2021. This was the biggest jump on record. At the same time, tenant costs in London are also sitting around all-time highs as people return to their workplaces en masse.
Rightmove said that the “imbalance between high tenant demand and low rental stock is supporting asking rent rises, and has led to competition between tenants for the rental properties available nearly doubling compared to the same period last year.” This imbalance will take many years to resolve and landlords could expect top-end rents for the foreseeable future.
I personally would seek to capitalise on this theme by buying a property stock like Residential Secure Income (LSE: RESI). Owning shares in a commercial landlord like this saves me the hassle of day-to-day property management that buy-to-let investors have to endure. It can also prove much more cost effective following recent tax and regulation changes to buy-to-let.
BIG dividends on the horizon
I also like Residential Secure Income because it’s classified as a real estate investment trust (or REIT). This means that, just like buy-to-let, investors here can expect to receive a decent level of income. REIT rules state that a company must distribute at least 90% of yearly profits to shareholders by way of dividends.
And Residential Secure Income offers up some pretty fatty dividends right now. At a price of 111p per share this UK property share boasts a 4.7% dividend yield for this financial year (to September 2022). The dial moves to 4.8% for financial 2023 as well.
In my opinion Residential Secure Income also offers brilliant value from a growth perspective. City analysts think earnings at this ‘nearly’ penny stock will soar 26% this year alone. This leaves the firm trading on a forward price-to-earnings growth (PEG) ratio of 0.8. Investing theory states that a reading below 1 suggests a stock could be undervalued by the market. By the way, profits are tipped to increase 6% in financial 2023 too.
A ‘nearly’ penny stock offering big rewards
Like any share, Residential Secure Income isn’t without its risks. The rising cost of building materials threatens to take a bite out of profits. Demand for rental properties might also dip if the Bank of England helps people buy homes by loosening mortgage lending rules later this year.
Still, it’s my opinion that the potential rewards of owning Residential Secure Income outweighs the risks. I’d happily buy it for my own UK shares portfolio right now.
Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has recommended Rightmove. 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.
