Real Estate Stock Offering a Jaw-Dropping Yield of 14.2%
Can This Double-Digit Yield Possibly Be Safe?
Real estate investment trusts (REITs) have been an income investor favorite for quite some time. Companies that choose to be regulated as REITs don’t have to pay income tax at the corporate level, provided that they return at least 90% of their profits to shareholders through regular dividend payments. As a result, REITs have been known as some of the most generous dividend payers.
Today I highlight one of the highest-yielding REITs in the current stock market: Uniti Group Inc (NASDAQ:UNIT).
Headquartered in Little Rock, Arkansas, Uniti Group Inc is a bit different from the average REIT. While most real estate companies tend to own office buildings, retail malls, or industrial warehouses, Uniti specializes in the acquisition and construction of mission-critical communications infrastructure, such as fiber and wireless towers.
Although Uniti’s portfolio does not consist of conventional real estate assets, it does provide the company with a steady stream of rental income just like an office building would. In the “Uniti Towers” segment, the company owns 667 wireless towers that are currently leased out at an average remaining contract length of 6.3 years. In the “Uniti Fiber” segment, tenants have signed agreements to lease the company’s 1.4 million strand miles of fiber for an average remaining lease term of 4.7 years. (Source: “Raymond James 39th Annual Institutional Investors Conference,” Uniti Group Inc, last accessed March 12, 2018.)
Furthermore, the “Uniti Leasing” segment has another 3.5 million strand miles of fiber leased out at an average remaining contract length of 12.3 years.
Combined, Uniti’s three segments have over $10.0 billion of revenue under contract, with makes the company well-positioned to generate stable cash flows.
And because of the mandatory distribution requirement needed to maintain its status as a REIT, Uniti Group Inc passes most of its profits to investors. The company currently pays quarterly dividends of $0.60 per share, giving UNIT stock an annual yield of 14.2%.
Of course, in a market where most companies pay less than four percent, a double-digit dividend yield could simply be a red flag about a stock’s dividend safety. Yet surprisingly, this unique real estate company manages to make enough money to cover its payout.
Uniti Group reported earnings earlier this month. In the fourth quarter of 2017, the company generated adjusted funds from operations (AFFO) of $112.4 million, or $0.64 per diluted common share, which was more than enough to meet its quarterly dividend obligation of $0.60 per share. (Source: “Uniti Group Inc. Reports Fourth Quarter and Full Year 2017 Results,” Uniti Group Inc, March 1, 2018.)
In full-year 2017, Uniti Group’s AFFO came in at $424.8 million, or $2.51 per diluted common share. This again provided ample coverage for the $2.40 per share of dividends that the company declared for the period.
With well-covered distributions and a business backed by long-term contracts, UNIT stock could be an opportunity for yield-seeking investors.