Finding reliable high-yield dividend stocks can be tricky. However, this doesn’t mean an investor should immediately discount any stock with a yield above 10% as being too high-risk. Here’s a FTSE investment trust I believe can strike a balance between offering a generous reward and avoiding excessive risk.
A European financier
I’m talking about Real Estate Credit Investments (LSE:RECI), a specialist investment company focused on European real estate debt. Put simply, it provides financing to property owners and developers, with the objective of generating attractive and relatively stable returns, particularly through quarterly dividends.
The business makes money from the interest paid on these loans and debt investments. Some might wonder how this means the stock can have a dividend yield of 10.3%. This is partly because some borrowers operate in more complex areas of the property market, so the interest rates charged can be considerably higher than normal.
From a dividend perspective, it typically pays out four dividends a year, and has consistently paid out 3p per share each quarter for several years.
Looking ahead
Over the past year, the share price is down 8%. This puts it at a 15% discount to the net asset value (NAV) of the portfolio. In my view, this reflects wider investor caution towards commercial property.
One risk is that interest rates in Europe are rising, and could increase here in the UK. This could negatively impact demand for loans, given the higher financing costs. Although it’s a risk for the dividends going forward, I think it’s manageable.
If an investor parked £2k in the trust today, by this time next year I think it could be worth more. I believe the stock could rally to reduce some of the discount to the NAV. At the same time, I don’t see any risks to the divdiend being cut.
So if we assume a 10.3% yield for the coming year, this would translate to £206. If the discount to the NAV halved, this would equate to a 9.5% rally from the current level, a profit of £190.
So in theory, £2k could be worth £2,396 by July 2027, based on the above reasoning. Of course, this isn’t guaranteed. There are risks that could cause the stock to fall, as flagged above. Yet the fundamental picture does provide some reasons for optimism.
For example, it could benefit from reduced competition as traditional banks remain cautious about property lending. This may allow the investment manager to negotiate attractive interest rates and grow the potential target market.
The portfolio’s also diversified, with 26 investments recently valued at more than £280m. This allows it to benefit from multiple projects doing well in the coming year.
Overall, I believe it’s a sustainable dividend share that investors seeking this type of high-yield exposure could consider for their portfolios.
Should you invest £5,000 in Real Estate Credit Investments right now?
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Jon Smith does not hold any positions in the companies mentioned
