A Large-Cap Stock With a Big Payout
There’s no other way to put it: dividend yields are near historical lows. And that means, for investors looking to earn passive income from stocks, things have gotten a lot more difficult.
Consider this: companies in the S&P 500 index offer an average dividend yield of just 1.7% at the time of this writing. That’s substantially lower than the index’s historical average dividend yield of 4.3%. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed February 18, 2020.)
If you use a stock screener, you can easily find stocks yielding 10%, 15%, or even 20%. But as we’ve seen plenty of times, ultra-high yielders aren’t really the safest bets.
What often happens is that an investor buys a double-digit yielder only to find that the company can’t really afford the payout. Buying a high-yield stock before it cuts its dividend can turn out to be a very expensive lesson. Not only will the investor collect less in dividends than they expected, but the dividend cut news can lead to a major downturn in the company’s stock price.
That’s why I always say, if you are a risk-averse investor, it’s better to go with the large, blue-chip companies that have a history of paying reliable dividends.
The thing is, though, everyone—from hedge funds, to mutual funds, to exchange-traded funds (ETFs), to retail investors—like blue-chip stocks. As a result, they’ve been buying shares of blue-chip companies left, right, and center, bidding up their prices.
And we know there’s an inverse relationship between dividend yield and stock price. The buying frenzy is one of the reasons why the S&P 500—which is made up of the biggest companies trading on U.S. stock exchanges—is not yielding that much these days.
However, it’s worth noting that, even though the average yield of S&P 500 companies is pretty disappointing, not every company is stingy.
For instance, Simon Property Group Inc (NYSE:SPG), which has been a component of the benchmark index since 2002, pays investors $2.10 per share of dividends on a quarterly basis. With SPG stock trading at $138.09 apiece, the quarterly dividend rate comes out to an annual yield of 6.1%.
In other words, if an investor purchased Simon Property Group stock today, they would be earning a yield that’s more than three times as high as the benchmark average.
Simon Property Group Inc
So, what is Simon Property Group?
As its name suggests, the company is in the property business. To be more specific, it is a real estate investment trust (REIT) that owns shopping, dining, entertainment, and mixed-use properties. SPG went public in 1993 and is headquartered in Indianapolis.
Right now, Simon Property Group’s portfolio consists of 233 properties totaling 191 million square feet. They are located in North America, Asia, and Europe. The company also owns part of Klepierre SA (OTCMKTS:KLPEF, EPA:LI), a French real estate company that owns shopping centers in 15 European cities. (Source: “Earnings Release & Supplemental Information Unaudited Fourth Quarter 2019,” Simon Property Group Inc, last accessed February 18, 2020.)
Recently, SPG announced that it would be acquiring an 80% stake in The Taubman Realty Group Limited Partnership. In particular, Simon Property will acquire all of Taubman Centers, Inc. (NYSE:TCO) common stock for $52.50 per share and the Taubman family will sell around one-third of its ownership interest at the transaction price. (Source: “Simon Property Group Inc to Acquire Taubman Centers, Inc.,” Simon Property Group Inc, February 10, 2020.)
The deal is subject to several required approvals and customary closing conditions. Management expects the transaction to close in mid-2020.
I should point out, that as it stands, Simon Property Group is already a huge company commanding over $40.0 billion of market capitalization. In fact, it is currently the only real estate company in the S&P 100.
And because SPG is a REIT, its business model is very easy to understand. The company collects rent from tenants and passes most of it to shareholders in the form of dividends. REITs are pass-through entities: as long as a REIT distributes at least 90% of its profits to investors through dividends, it pays little to no income tax at the corporate level.
Of course, because Simon Property owns shopping centers, some investors have been concerned about how the company will perform in the so-called “retail apocalypse.” One of the reasons behind the REIT’s high yield today is the downturn in its share price. Over the past 12 months, SPG stock has tumbled more than 20%.
Is the Dividend Safe?
So the big question now is, can investors count on the dividends of this beaten-down, high yielder?
Well, the first thing to note is that, despite headwinds coming from the retail industry, Simon Property’s portfolio looks solid. At its U.S. malls and premium outlets—which represent nearly 80% of its total portfolio by net operating income—the occupancy rate stood at 95.1% as of December 31, 2019. (Source: “Earnings Release & Supplemental Information Unaudited Fourth Quarter 2019,” Simon Property Group Inc, op cit.)
The leasing spread per square foot in 2019 was $7.83, which translated to a 14.4% increase.
Moreover, in 2019, Simon Property Group Inc’s comparable property net operating income increased 1.4% at its North American properties. When including international comparable properties on a constant-currency basis, the company’s comparable property net operating income growth was 1.7% for the year.
And like most REITs, Simon Property Group reports something called funds from operations (FFO). To see whether a REIT’s dividend is safe in a given reporting period, all you need to do is compare its FFO to its actual payout.
In the fourth quarter of 2019, Simon Property generated comparable FFO of $3.29 per share. The amount not only represented a 2.8% increase year-over-year, but also easily covered its quarterly dividend payment of $2.10 per share.
In full-year 2019, Simon Property Group Inc’s comparable FFO grew 4.4% from 2018 to $12.37 per share. Considering that the company declared and paid total dividends of $8.30 per share during the year, its payout ratio came out to 67.1%.
When it comes to REITs, I prefer those that pay out less than 90% of their FFO so there is a margin of safety. In the case of Simon Property Group, the payout ratio is well within my comfort zone and ensures that, even if business slows down, there will be a good chance for the REIT to still outearn its payout.
Mind you, even though high-yield stocks aren’t usually known for their dividend safety, Simon Property has actually been offering an increasing payout. In just the last five years, Simon Property Group stock’s quarterly dividend rate went from $1.40 per share to $2.10 per share, marking a total increase of 50%. (Source: “Dividend History,” Simon Property Group Inc, last accessed February 18, 2020.)
And remember when I said the company is buying The Taubman Realty Group Limited Partnership? Well, the deal just might become the next catalyst for SPG stock. In a press release, Simon Property’s chairman, president, and chief executive officer David Simon said, “We are very pleased to announce this transaction, which will be immediately accretive to Simon’s FFO.” (Source: Simon Property Group Inc, February 10, 2020, op. cit.)
In particular, Simon Property expects that, after the transaction closes, it will give at least a three-percent boost to its FFO per share on an annualized basis.
Bottom Line on Simon Property Group Inc
Admittedly, there are companies running more exciting businesses than Simon Property Group Inc, and there are higher yielding stocks than SPG stock.
But for investors who want to earn an oversized yield from an established blue-chip stock, this REIT deserves a serious look.