The Motley Fool

Retirement Savings: How to Generate a Growing Passive Income From REITs

Image source: Getty Images

The global property sector has historically offered a relatively stable and rising income return for investors. Certainly, there have been periods of volatility and uncertainty, but investors who have held for the long term have often been rewarded with a high and growing passive income.

As such, holding real estate investment trusts (REITs) within a portfolio could prove to be shrewd move. While diversity and an appealing yield are likely to be important to income investors, holding for the long term could prove to be equally valuable when seeking to build a rising passive income.

Holding multiple REITs

While a REIT typically invests in a wide range of properties, in some cases they may follow a specific theme. For example, a REIT may specialise in retail properties, or in offices. As such, it could be prudent to hold multiple REITs that focus on different types of assets within a portfolio in order to reduce overall risk.

Likewise, it may be a worthwhile move to own REITs that operate in different geographies. Even within the same country there can be differences in the growth rates of one region versus another. And, with purchasing international stocks now easier due to online sharedealing, diversifying in terms of exposure to different countries may reduce overall risk within a portfolio. This could produce a more reliable passive income in the long run.

5 TSX Stocks Under $5

Click here to learn more!

Long-term growth potential

While the property market is cyclical, in the long run it has historically offered significant levels of growth. As such, it could be beneficial for an investor to not only hold on to their REITs during downturns for the wider economy, but to increase their exposure to the sector during periods where there are REITs trading significantly below their net asset value.

This approach could allow investors to benefit from what is likely to be rising demand for a wide range of property over the long run. With world population rising and the rate of building new properties generally lagging it in many parts of the world, global property prices may continue their upward trajectory over the coming years.

Return potential

While REITs that have high yields can offer attractive income returns today, they may also deliver improving levels of capital growth over the long run. A high yield may prove to be a sound indicator of a REIT trading at a discount to its intrinsic value, and could therefore provide an investor with the potential for impressive total returns over the long run.

While capital growth may not be the primary concern for investors who are seeking to generate a passive income, a larger portfolio makes the task of obtaining a second income somewhat less challenging. As such, it may be worth paying attention to a REIT’s yield for guidance on its valuation, as well as its income return potential.

5 Canadian Growth Stocks Under $5

We are giving away a FREE copy of our "5 Small-Cap Canadian Growth Stocks Under $5" report. These are 5 Canadian stocks that we think are screaming buys today.

Get Your Free Report Today

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.