This Real Estate Stock Yields 10.8%, But Is the Payout Safe?
Should Investors Consider This High-Yield Stock?
If you’ve been following the market of dividend stocks, you would have noticed that some sectors tend to provide higher yields than others. Real estate is a good example of this. The reason is simple: most real estate companies own real estate properties, and lease out the properties and collect steady rental income streams.
Furthermore, after President Dwight Eisenhower signed into law the REIT Act contained in the Cigar Excise Tax Extension of 1960, a special group of companies called “real estate investment trusts” (REITs) were created.
The key to note here is that in order for a company to obtain a REIT status, it must distribute at least 90% of its taxable income to shareholders every year in the form of dividends. That’s why REITs have become some of the highest-yielding dividend stocks in today’s market.
Select Income REIT (NASDAQ:SIR), for instance, pays quarterly dividends of $0.51 per share, which comes out to an annual yield of 10.8%.
Of course, even the real estate business can have its ups and downs. Tenants could be behind on their rent payments, and properties may stay vacant for a few months before finding new tenants. Therefore, before loading up on any real estate stock, it’s important to check whether the company has enough resources to back its dividend policy.
Select Income REIT owns properties that are primarily net leased to single tenants. By the end of 2017, the company owned 366 buildings, leasable land parcels, and easements totaling 45.5 million square feet located across 36 states. (Source: “Investor Presentation – March 2018,” Select Income REIT, last accessed April 23, 2018.)
The company’s strategy is to focus on owning office properties that are strategic to tenants, such as corporate headquarters, build-to-suit facilities, and buildings in which tenants have invested a significant amount of capital. Because tenants tend to stay at these strategic locations for a relatively long time, Select Income REIT can earn a steady stream of rental income.
Since Select Income REIT’s initial public offering (IPO) in 2012, it has acquired 115 net leased office and industrial buildings with a weighted average remaining lease term of more than 11 years. As of the end of 2017, the company’s portfolio has an occupancy rate of 96.2%. (Source: “Select Income REIT Announces Fourth Quarter and Year End 2017 Results,” Select Income REIT, February 16, 2018.)
And thanks to these net-leased structures, tenants are responsible for paying most of the operating expenses associated with the leased properties. This leaves more cash to be distributed to shareholders. Indeed, since Select Income REIT completed its IPO, the company has raised its payout on six different occasions.
But does the company make enough money to support its generous payouts? Well, in 2017, Select Income REIT generated normalized funds from operations of $2.35 per share while declaring total dividends of $2.04 per share. That translated to a payout ratio of 86.8%. In other words, the company was not paying out all the cash it generated from operations.
As for its performance in 2018, the company is scheduled to report first-quarter earnings on Tuesday, May 1 before market open. So we’ll have some more updated information regarding its dividend safety by then.
Based on the information that’s currently available, Select Income REIT’s 10.8% dividend yield remains safe.