30,000 shares in this FTSE 250 REIT would bring me £559 a month in income

Real estate investment trusts (REITs) are firms that lease properties to tenants and distribute their rental income to investors as dividends. And they can be a great source of income.

Whether in the UK or the US, a number of REITs are listed on the stock market. And there is one from FTSE 250 which I hold in my portfolio.

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Company

The stock is Basic Health Structures (LSE:PHP). It owns and leases a portfolio of GP surgeries in the UK and Ireland, with the majority of its rent coming from the NHS.

This year, the company has returned 6.9p per share to investors in the form of dividends. That doesn’t sound like much, but at a share price of 93p, that equates to a 7.4% yield.

That’s above the UK average, but it’s not a huge deal. This company has increased its dividend per share since 1996 and I think it is in a good position to continue doing this.

Having the NHS as its main tenant reduces the risk of rent defaults, while demand is likely to remain strong. And that should allow Primary Health Properties to raise rents over time.

Statistics

At today’s rates, 30,000 shares in Primary Health Properties make £2,070 a year in passive income. But strong growth on the long-term horizon should see this increase significantly.

I expect long-term inflation in the UK to be above 2%. So if the company can manage just 1% per year in real terms, that’s 3% annual rent growth.

Over 30 years, this turns £2,070 a year into £6,713 a year – or £559 a month. And that’s unless the company does something other than raise rents by 1% a year in real terms.

I don’t have 30,000 shares yet. If the dividend yield stays at 7.5% I can get to that level by reinvesting my earnings for 30 years, but I have a different plan for my investment.

Road to 30,000 shares

Regular investment in a fixed plan can be a good strategy. But I prefer to focus on my purchases if I think the price adequately reflects the risk in the underlying business.

The biggest thing I noticed about Primary Health Properties is its credit. At £1.3bn, it is roughly the same as the company’s market-cap and implies a loan-to-value ratio of 48%.

That’s high and carries the risk that the company will have to issue more shares to dilute it in the future. That will reduce the value of each share that dividends receive.

As the share price fluctuates, I look to buy if I think the dividend yield is high enough to cover this risk. I wouldn’t consider this a 5% yield buy, but I would advocate for 8%.

Budget money

I hope to increase my stake in Primary Health Properties to 30,000 shares – and more. But if I can’t buy a stock at a price I like, I’m happy to invest elsewhere.

Ultimately, I’m looking for the best investment opportunities I can find. And having them in a Stocks and Shares ISA should help shield my income from dividend tax – at least for now.