Real estate investment trusts (REITs) are a popular way for people to earn income from the stock market. However, they still need to be treated with caution, as not every trust in the sector is a good pick. Yet when I spotted this REIT with a 7.66% dividend yield, it certainly got my interest. Is it worth buying now?
Reviewing the details
I’m talking about AEW UK (LSE:AEWU). The share price is up a modest 3% over the past year. The company buys and manages smaller commercial properties across the UK. I’m talking about offices and retail units, with the management team often targeting assets priced below £15m that larger institutional investors might ignore.
In a way, the trust is focused on value investing, but in the property space. As a result, income comes not just from rental flows, but also from capital appreciation over time from buying mispriced or underperforming buildings.
The lack of serious share price growth in the last year does speak to the fact that the UK commercial property sector has been under pressure from higher interest rates and economic uncertainty.
That’s weighed on valuations and sentiment, even for AEW, which I would describe as a well-run trust. Yet I believe this makes the stock undervalued. For example, the share price trades at a 5.3% discount to the net asset value (NAV). In theory, there shouldn’t be a discount, but the difference indicates to me some lingering negative sentiment weighing on the stock.
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Dependable income
Despite the challenges, AEW has shown resilience. It’s maintained a remarkably consistent dividend track record, with 41 consecutive quarterly payments! This clearly signals underlying cash flow strength. On top of that, the company continues to actively manage its portfolio to target higher-yielding opportunities.
In my view, a major benefit was highlighted in the latest quarterly results. It mentioned that the “company continues to benefit from a low fixed cost of debt of 2.959% until July 2027”. This helps ensure financing costs in the coming year won’t catch the business off guard.
The above means that the dividend per share seems very sustainable to me. If an investor put £2k in the stock, the quarterly dividends could start to accumulate. If the dividends were reinvested back in the stock, things could compound faster. After a decade, without having to put another penny of capital in, it could pay out £340.55.
Of course, there are risks associated with dividends. There’s no guarantee they’ll continue into the future. If the trust runs into problems, it could result in the income being reduced. However, given the trust’s current outlook and financial situation, I think it’s a stock worth considering.
