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Looking for sustainable dividends and income? Don’t forget the REITs

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Property trusts, or REITs (Real Estate Investment Trusts) to give them their full name, rarely attract a lot of interest from readers.

That’s somewhat ironic, because articles about dividend stocks do attract a lot of readers and since REITs are perfect dividend stock candidates, I’m not sure why REITs have a relative lack of appeal.

They’re not very sexy, but for reliable income and steady earnings growth over time it’s hard to look past a REIT.

One major benefit is long lease periods, often with guaranteed rental increases, which offer virtually guaranteed income and reduce the risks (at least in the near term, and assuming the REIT isn’t involved in sales or property development) of income dwindling when the market crashes.

As ever, price is important, which is why not all of the following companies look like a buy at present.

Goodman Group (ASX: GMG) recently reported a strong third quarter update, with 96% occupancy and a 4.3 year weighted average lease expiry, which is good without being outstanding.

Property sales and development continue to provide a boost to company operations (operating profit was up 10.5% at the half year), and a 3.4% growing albeit unfranked dividend is keeping investors interested.

The main drawback to my eye is the fact that Goodman shares are trading at nearly twice Net Tangible Asset (NTA) value, which is a high premium for this kind of business.

I can’t encourage readers to cough up that kind of margin for a REIT, but other companies like Scentre Group Ltd (ASX: SCG) are much cheaper and offer similar performance.

Scentre’s portfolio is more than 99.5% leased, and an operational update released this morning showed continued strong growth in specialty sales and reasonable rent increases.

(You can find out more about Scentre’s results in this article here)

During the past year Scentre also issued more than US$1 billion in bonds at very low rates which should underpin its growth going forwards.

Offering a 5.5%, partially franked and growing dividend, Scentre Group is a great stock for income investors and trades at a 25% premium to its NTA. This premium is also a little high, but I would be comfortable paying today’s prices for shares in Scentre Group.

(For the record, I bought my SCG shares at ~$3.30)

Other companies like Stockland Corporation Ltd (ASX: SGP) and GPT Group (ASX: GPT) have also released positive updates in recent days and offer a great income opportunity.

Stockland is a little more aggressive, being involved in property sales and development in addition to management, but in turn rewards investors with high-single digit profit growth per annum. Comparable to Scentre Group it trades on a 17% premium to NTA and offers a 5.5% unfranked, growing dividend.

GPT is a little more conservative with mid-single digit growth and a 4.9% unfranked dividend. With Net Tangible Assets of ~$3.90 per share, GPT is actually the cheapest looking of today’s shares as slower growth commands a smaller premium.

There are a pile of other REITs with something to offer, such as Cromwell Group (ASX: CMW)Abacus Property Group (ASX: ABP) and many more. With the wide variety there’s bound to be one to suit your portfolio, and investors certainly can’t complain that they lack choice in dividend stocks!

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Returns As of 6th October 2020

Motley Fool contributor Sean O'Neill owns shares in Scentre Group Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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