2 REITs with growing dividends for income investors

Credit: Steve Webel

Real estate investment trusts (REITs) are a good way to develop a growing stream of distributions (dividends). There is a wide array of REITs on the ASX such as farmland landlord Rural Funds Group (ASX: RFF) and self-storage operator National Storage REIT (ASX: NSR).

Another variety of REITs own commercial property and lease it to large commercial tenants. This can provide a reliable and growing income as long as the property has a long-term tenant.

Here are two REITs with a large property portfolio, solid tenants and growing dividends.

BWP Trust (ASX: BWP)

BWP is the owner of 80 Bunnings Warehouse sites around Australia, it also owns a few other retail spaces adjacent to the sites.

Wesfarmers Ltd’s (ASX: WES) Bunnings has done incredibly well, growing profits year on year and crushing Woolworths Limited’s (ASX: WOW) Masters. BWP has one of the better businesses in Australia as its tenants.

This success has allowed BWP to increase its rental income and the distributions have grown as a result. Between FY11 and FY16, BWP grew its total distributions by 40% to 16.8 cents per share.

Bunnings should continue to be a popular business for a long time to come as Australia’s population increases, more homes are needed and renovations remain popular. BWP can keep growing its profit because of the rental increases that are built into its contracts, these are usually at the consumer price index (CPI) rate or fixed at a 3% increase. BWP can keep acquiring other Bunnings sites too.

BWP shares are 22.5% down from their July 2016 highs. I think this is due to two reasons, the first is that high-yielding and slow growing stocks such as BWP are likely to be affected by the expected Fed interest rate rise in December.

The second is that in August, management advised that up to seven properties would be vacated by Bunnings. Bunnings is responsible for paying the rent until the lease ends, however losing its mainstay tenant for these properties isn’t a good change.

The drop in share price has increased the potential dividend yield for BWP and it’s now trading with a 5.7% yield. Management have confirmed it expects the distribution to be 3% higher for FY17.

Goodman Group (ASX: GMG)

Goodman is a global property group that owns and manages industrial, retail, and office real estate around the world. Around 59% of its operating income came from overseas during FY16.

With Japan Post (Toll), Deutsche Post (DHL), Zalando and Amazon as its top four customers by income, it has some of the highest quality tenants you could ask for.

Its diverse and high-quality tenants led to Goodman increasing its operating earnings per share by 7.8% in FY16 compared to FY15. Management have forecasted operating earnings per share to increase by another 6% in FY17.

With a price/earnings ratio of 9.8, Goodman is looking pretty cheap at the moment with the shares trading 12.5% lower than the August 2016 high of $7.76. Its current dividend yield of 3.5% isn’t as high as other REITs, but its payout ratio of 60% is much lower and allows Goodman to re-invest more of its profits back into growing the business.

Foolish takeaway

Both of these stocks would be good long-term additions to any Foolish investor’s portfolio. Out of the two, I prefer Goodman for its globally diverse portfolio and mix of tenants. BWP has benefited from Bunnings’ strength in recent years, but having one main tenant isn’t very diverse and could be a risk in the future.

There is a chance that both Goodman and BWP keep seeing declines in their share price, with the expectation of a Fed interest rate rise in December.

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Motley Fool contributor Tristan Harrison owns shares in Rural Funds Group. 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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