Those looking to earn a second income from dividend shares are likely to be attracted to a stock with a yield of 7%. But experienced investors know that high yields can be a warning sign of trouble ahead.
With this in mind, let’s take a closer look at the prospects of this real estate investment trust (REIT) that’s increased its payout for eight consecutive years.
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Supermarket Income REIT (LSE:SUPR) invests in grocery stores in the UK and France. It provides investors with an opportunity to have a stake in the real estate market without having the hassle of being a landlord.
Significantly, a REIT must return at least 90% of its property income to shareholders each year by way of a dividend. If it doesn’t, then it loses certain tax privileges.
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This means many REITs (not all) offer yields that are higher than those of more conventional trading companies. For example, stocks on the FTSE 100 have a typical payout ratio of 50%-60% and a current (1 July) yield of around 3.1%.
However, Supermarket Income still needs to be profitable to pay a dividend. After all, 90% of nothing isn’t worth very much.
Potential challenges
Of concern, the REIT’s a stock that’s particularly sensitive to higher interest rates. With relatively large borrowings, it stands to reason that its bottom line will be affected by increased finance costs. We don’t yet know how the war in the Middle East will impact inflation and whether the Bank of England will have to tighten monetary policy.
But there’s another potential problem should interest rates go up, or remain higher for longer than anticipated. In these circumstances, investors are able to earn a better return elsewhere, with less risk. This probably explains the steady decline in the group’s share price over the past four years or so.
Of course, nobody wants to see their capital eroded. But in my opinion, Supermarket Income – as its name suggests – is all about its dividend. Those wanting a stock whose share price could take off should probably look elsewhere. This one’s all about income.
A good track record
And a look at its full-year dividend payments since listing in 2017, shows a trend of steadily increasing payouts. In cash terms, it’s grown 11.3%.
- FY18 – 5.5p
- FY19 – 5.632p
- FY20 – 5.799p
- FY21 – 5.86p
- FY22 – 5.94p
- FY23 – 6p
- FY24 – 6.06p
- FY25 – 6.12p
Admittedly, there are plenty of other stocks that have seen their dividends grow faster, but at least it’s going in the right direction. For the year ended 30 June (FY26), it’s targeting (no guarantees) 6.18p. If this is achieved, it means the stock’s currently offering a forward yield of 7%. This puts it in the top 10% of FTSE 250 stocks.
My view
Personally, with omnichannel (online and physical) stores here to stay, I think the supermarket sector’s one of the best to invest in. Specifically, Supermarket Income has impressive blue-chip tenants, a 12-year weighted average unexpired lease term, a 100% occupancy rate, no bad debts, and the second-lowest cost/rent ratio of the FTSE 350’s REITs. In addition, 80% of it rental income is index-linked.
Describing Supermarket Income as a no-brainer bargain might be a bit over the top, but due to its high-yield and reliable dividend it remains one of my favourites to consider. In fact, I think income investors could also explore other REITs when looking for their next interesting opportunity.
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James Beard owns shares in Supermarket Income REIT.
