Lock in a 13% Yield That’s Surprisingly Safe
A High-Yield Stock That’s Actually Worth Considering
Even in today’s bloated stock market, finding high-yield stocks is easy. Just go to any of the financial web sites, set dividend yield as the screener, and you’ll see dozens of stocks with double-digit payouts.
What’s a lot more difficult, though, is finding high-yield stocks that are actually worth considering. When the average S&P 500 company is paying less than two percent, most ultra-high yielders don’t offer much in terms of dividend safety.
That’s why today, I would like talk to you about a rare find among high-yield stocks, Washington Prime Group Inc (NYSE:WPG). Washington Prime Group operates in the real estate sector. The company owns a portfolio of properties spread across the United States. By collecting rental income from its tenants, the company can afford to have a quite generous dividend policy.
Right now, WPG stock pays quarterly dividends of $0.25 per share, which comes out to an annual yield of 13%.
Whenever you see a double-digit yielder, the first thing you should check is whether the company makes enough money to cover its payout. So, let’s take a look at Washington Prime Group’s financials.
Funds From Operations
Instead of looking at earnings in the real estate business, I prefer to look at the funds from operations (FFO). This is because the metric excludes non-cash items, such as depreciation and amortization, and it provides a more accurate measure of cash generated from a real estate company’s operation.
Last year, Washington Prime Group’s adjusted FFO came in at $1.63 per share. Given its total dividends of $1.00 per share paid for the year, the company had a payout ratio of 61.3%. That has left a wide margin of safety. (Source: “Washington Prime Group Reports Fourth Quarter and Fiscal Year 2017 Results,” Washington Prime Group Inc, February 21, 2018.)
In the first quarter of this year, Washington Prime Group generated FFO of $0.39 per share. Again, this easily covered the company’s quarterly dividend payment of $0.25 per share. (Source: “Washington Prime Group Reports First Quarter 2018 Results,” Washington Prime Group Inc, April 25, 2018.)
Going forward, management expects Washington Prime Group’s FFO to come in between $1.48 per share and $1.56 per share for full-year 2018. If the company achieves the midpoint of this guidance range, it would generate FFO of $1.52 per share. This would be more than enough to meet its annual dividend obligation of $1.00 per share.
Stable Rental Income Stream
Real estate has always been one of the best places to earn a steady income stream. By the end of the first quarter of 2018, Washington Prime Group’s portfolio consisted of 108 assets totaling 59 million square feet. The occupancy rate for the company’s core portfolio stood at 92.8% at the end of March. (Source: “Washington Prime Group Nareit REITWeek June 2018,” Washington Prime Group Inc, last accessed June 7, 2018.)
And because Washington Prime Group chooses to be regulated as a real estate investment trust (REIT), it must distribute most of its profits to investors through dividends. Therefore, as long as the company can rent out its properties, shareholders of WPG stock can continue to receive oversized dividends.
Of course, like most double-digit yielders, Washington Prime Group is not perfect. The company owns mostly shopping centers. And due to the threat of the booming e-commerce industry, some investors are concerned about the future of this retail REIT.
However, the company is not standing still. Other than owning retail stores, Washington Prime Group has also started to focus on what it calls “lifestyle tenancy,” such as food, beverage, entertainment, and fitness. In fact, 44% of total new leasing activity in the first quarter of 2018 was lifestyle tenancy. Due to the nature of their businesses, lifestyle tenants should do well, even when the retail headwind persists.
Most recently, investors have started to notice this solid REIT. In just the last month, WPG stock surged more than 10%. Income investors wishing to lock in a high dividend yield may want to act quickly.