Dividend shares are a great way of earning a second income. However, it pays to shop around because there can be a huge variation in yields. Also, some stocks have better track records than others when it comes to maintaining their payouts.
With this in mind, here’s one that I think could appeal to income investors.
Who?
Supermarket Income REIT (LSE:SUPR) leases large grocery stores to supermarket chains in the UK and France.
As a real estate investment trust (REIT) it must return at least 90% of its rental profit to shareholders by way of dividends each year. If it doesn’t, it will lose its special tax status and will have to pay standard rates of corporation tax on its earnings.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Since listing in 2017, it’s increased its payout every year. At the moment (11 July), the stock’s yielding 7% (no guarantees).
It means a £10,000 investment could produce dividend income of £700 over the next 12 months. If this was maintained and the cash reinvested, the initial lump sum would double in just over 10 years.
Adapting to survive
Despite there being a number of factors that could impact its earnings — including higher interest rates – and the fact that its share price performance is unlikely to match that of some more exciting stocks, I think the REIT could continue to grow its dividend.
That’s because the supermarket sector, particularly in the UK, remains buoyant. In my opinion, the predicted post-pandemic demise of the large grocery store was greatly exaggerated.
In 2020, at the height of the pandemic, Tim Steiner, Ocado’s chief executive, predicted that as online shopping increased in popularity, it would “destroy the profitability of most supermarket groups in the UK”. He added: “Not every store will disappear, but there will be a dramatic shift”.
But…
Six years on, his belief that his company would then pick up the pieces seems wildly misplaced. Since March 2020, Ocado’s share price has tanked over 85%.
Instead of being forced into the arms of Ocado, supermarket chains have adapted to online shopping and used their physical stores to meet demand. Whereas Steiner thought the internet would increase the need for Ocado’s huge customer fulfilment centres (CFC), it now appears as though he was overly optimistic.
Why do I say this? Kroger‘s closing three CFCs in the US and Sobeys is shutting its facility in Calgary. Instead, these grocers are using their ‘old-fashioned’ premises to accommodate both online and in-store shoppers.
Ocado continues to be one of the most impressive vehicles for shareholder value destruction we have seen. For a company once seen as the future of supermarket delivery, its fate has been to be overtaken by its more pedestrian, but larger, rivals utilising their size and reach and building on their existing business to tell a much more compelling story for investors.
Chris Beauchamp, IG
My view
That’s why I’m a fan of Supermarket Income REIT. Alongside its blue-chip tenants, 100% occupancy, no bad debts, second-lowest cost:income ratio on the FTSE 350, and impressive dividend track record, I think it’s an amazing income stock to consider.
In fact, I think there are lots of interesting opportunities among the UK’s REITs that are worthy of further research.
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James Beard owns shares in Supermarket Income REIT.
