If You Want to Earn a Double-Digit Yield, Read This
Longtime readers of this column would know that I like to look into the beaten-down sectors of the stock market. Because dividend yield moves inversely to share price, some of the down-and-out tickers can offer great income opportunities. And right now, retail real estate could be one of these sectors.
You see, as the e-commerce industry enters main stage, people are spending more and more time (and money) on various online shopping platforms. As a result, many physical retailers—especially department store operators—have reported substantial declines in sales and profits. Some are on the verge of bankruptcy. Just take a look at the share price performance of Macy’s Inc (NYSE:M) and Sears Holdings Corp (NASDAQ:SHLD) over the last several years and you’ll see what I mean.
And retailers weren’t the only companies that became out of favor in the eyes of stock market investors. Because most retailers rent their retail space, the downturn in the retail sector could impact the owners of retail properties.
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WPG Stock: How You Can Earn a 14.06% Yield from Real Estate
Washington Prime Group Inc (NYSE:WPG), for instance, is a real estate investment trust (REIT) that invests in shopping centers. As of September 30, 2017, the company’s portfolio includes investments in 110 enclosed and open-air retail venues totaling 60 million square feet. (Source: “Global Mizuho Investor Conference,” Washington Prime Group Inc, last accessed December 29, 2017.)
Like most retail REITs, WPG stock hasn’t been a hot commodity. Over the last 12 months—a period where all three major indices of the U.S. stock market surged past their all-time highs—WPG stock tumbled more than 30%.
But as I mentioned earlier, beaten-down stocks can sometimes offer substantial income opportunities. In the case of Washington Prime Group, the downturn in its share price allowed WPG stock’s annual yield to climb to a jaw-dropping level of 13.9%.
To put it in perspective, the average dividend yield of all S&P 500 companies right now is 1.8%.
In other words, investors purchasing WPG shares today can lock in a yield more than seven times the benchmark’s average.
Of course, in today’s market, an ultra-high yield like this could simply be a sign of trouble. But if you take a look at the company’s financials, you’d see that things may not be as bad as WPG’s share price seems to suggest.
In the real estate business, a key metric to look at funds from operations (FFO), which represents the amount of cash generated from a REIT’s operating activities. In order for a REIT to pay sustainable dividends, it needs to generate enough cash to at least cover its distributions.
Washington Prime Group’s most recent earnings report showed that in the third quarter of 2017, the company generated FFO of $81.5 million, or $0.37 per diluted share. Given that it paid a dividend of $0.25 per share during this period, the company had a payout ratio of 67.6%. (Source: “Washington Prime Group Reports Third Quarter 2017 Results,” Washington Prime Group Inc, October 25, 2017.)
Here at Income Investors, we prefer companies with payout ratios of less than 75%, as it leaves a margin of safety. So despite being one of the highest-yielding stocks in the current market, Washington Prime Group’s payout ratio is well within our comfort zone.
Final Thoughts on This High-Yield Stock
Due to the downturn in the retail industry, I wouldn’t call WPG stock a slam dunk. But give the company’s generous cash payout and sizable cash flows, Washington Prime Group could be an opportunity for yield-seeking investors.