Out-of-Favor Stock Pays Investors a Jaw-Dropping Yield of 13.4%
A High-Yield Stock You Likely Haven’t Considered
If you ask an income investor what kind of yield they want from a dividend stock, the answer will likely be “the higher, the better.” But, because of the popularity of many high-yield stocks, their share prices have already been bid up, causing their yields to drop.
As a result, you rarely see a well-known company offering a payout north of six percent.
In fact, the S&P 500 index, which contains the biggest companies trading on U.S. stock exchanges, has an average dividend yield of less than two percent at the moment.
Still, that doesn’t mean investors have to give up the idea of owning high-yield stocks altogether. For those willing to dig into the out-of-favor sectors of the stock market, it’s still possible to find companies offering much higher yields than the benchmark’s average.
Case in point: Washington Prime Group Inc (NYSE:WPG) stock was far from being a market favorite over the last few years. Today, it offers investors a staggering annual yield of 13.4%.
The reason behind WPG stock’s rough ride was its exposure to the retail sector.
Headquartered in Columbus, Ohio, Washington Prime Group is a real estate investment trust (REIT) that owns, manages, acquires, and develops retail properties. By the end of last year, the company’s portfolio consisted of 108 assets totaling 59 million square feet. (Source: “Citi Global Property CEO Conference March 2018,” Washington Prime Group Inc, last accessed May 23, 2018.)
As we know, the retail sector hasn’t been in the best of shape lately. As consumers have embraced online shopping, quite a few brick-and-mortar retailers have reported sizable year-over-year sales declines.
So, the big question now is: “Is the payout safe?”
Is the WPG Stock Payout Safe?
Whenever I see a beaten-down high-yield stock like Washington Prime Group, I like to check its dividend history. While past performance does not guarantee future results, a company’s dividend history can provide valuable insights about its management’s attitude toward returning cash to investors.
In particular, if a company’s management has cut back the dividend before, they probably wouldn’t be shy about doing it again when times get tough.
The good news is, since Washington Prime Group was formed in 2014, management has maintained its quarterly dividend rate at $0.25 per share. (Source: “Washington Prime Group Inc. Dividend Date & History,” Nasdaq, last accessed May 23, 2018.)
Here’s the best part. Despite the downturn in the retail industry, the company still earns more than enough cash to cover its payout.
Last year, Washington Prime Group generated adjusted funds from operations (AFFO) of $1.63 per share. Its dividends totaled $1.00 per share for the year. That translated to a payout ratio of 61.3%, leaving a 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 2018, the company’s FFO came in at $0.39 per share, which again, easily covered its 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 to generate FFO of between $1.48 and $1.56 per share for full-year 2018. At the midpoint, $1.52 per share, that should still be more than enough to meet its annual dividend obligation of $1.00 per share.
Battling Retail Headwinds
Washington Prime Group is not standing still. Due to headwinds from the retail industry, the company has been focusing on increasing its lifestyle tenancy, which includes food, beverage, entertainment, and fitness.
In the first quarter of 2018, lifestyle tenancy accounted for 44% of the company’s total new leasing activity. Because these tenants—such as restaurants, bars, movie theaters, and fitness clubs—provide an experience rather than just selling a physical product, they should do well, even when the e-commerce industry further expands.
As it stands, WPG stock could be an opportunity for yield-seeking investors.