Big Yellow Group (LSE:BYG) is one of my all-time favourite passive income investments. The reason I love it so much is that it’s quite unusual. It’s a real estate investment trust (REIT), but it operates in storage rentals rather than living accommodation or office space.

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This month alone, the shares have gained nearly 8.5% in price. Yet I still consider it undervalued and set for long-term growth, and its dividend has a history of regular increases too. The yield is currently 3.7%.

Investing in the UK

One of the drawbacks of investing in Big Yellow Group is that it has no global diversification. All of its operating revenue comes from the UK.

This means that if I have it in my portfolio, I’ll need to fulfil my geographic diversification through other investments. That would help to protect my assets from any macroeconomic challenges that may arise in specific regions.

A closer look at the dividend

There’s a really powerful metric in financial analysis called the ‘yield on cost’. This tells me what the dividend yield of an investment is, based on when I bought it. If I’d bought Big Yellow shares five years ago, my yield on cost would be 5.2% today.

Additionally, management hasn’t instigated any dividend reductions since 2011. The 10-year dividend growth rate is 13.3% annually. What’s even more impressive is that if I’d bought the shares 10 years ago, my dividend yield on cost would be 12.8% today.

I consider the shares undervalued

Big Yellow shares have a price-to-earnings (P/E) ratio of just 12, which is roughly what it has been as a median over the past decade.

I consider the shares undervalued because the company is delivering healthy growth, including increasing its dividend regularly. Therefore, I think its P/E ratio should be a little higher as a result.

In my opinion, a P/E of around 14 seems fair to me for Big Yellow at the moment. That means there could be roughly a 15% discount available here.

Exposure to property risks

An investment in Big Yellow Group means I’m exposed to property market fluctuations, including consumers’ changing demand, which could affect storage rental pricing. During severe recessionary periods in the UK, it’s not unlikely that the company would reduce its dividend periodically.

In addition, there’s a lot of competition in the space from smaller businesses. There are also big firms like SAFE Storage, which operates in a very similar manner to Big Yellow. However, SAFE also has operations overseas, giving it a headstart in international markets that could be a long-term competitive advantage.

A great dividend investment?

Yet I still like it… a lot. I don’t own many investments that have high dividend payments because, at this stage of my career, I want to focus on growth. However, Big Yellow Group has been on my watchlist for a while, and when it comes time for me to search for residual income from my portfolio structure, I think this company is one of the first I’ll invest in.