1 cheap dividend stock I’d buy to generate passive income

The era of home working may soon be over. Zaven Boyrazian analyses one cheap dividend stock that’s generating a substantial amount of passive income.

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Office buildings have remained mostly empty over the past year due to Covid-19. However, with the vaccine rollout underway, people may soon be returning to the office for work. Which is excellent news for one cheap dividend stock I’ve recently stumbled upon. Should I consider adding it to my passive income portfolio? Let’s take a look.

Generating passive income with real-estate

Workspace Group (LSE:WKP) is a real estate investment trust that owns 58 properties throughout London. It rents these out to businesses as flexible office space which, as previously stated, has unfortunately remained predominantly empty for months.

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Covid-19 has not been kind to many office space providers, and Workspace Group is no exception. Occupancy rates throughout 2020 fell from 93% to 82%. But the stock was able to ensure rent collection rates stayed above 90%, which I thought was quite impressive. However, this figure is somewhat inflated when considering nearly 80% of its customers were given a temporary 50% discount on their leases. As a result, net rental income dropped by almost 40% at the end of 2020.

Needless to say, these figures aren’t great, so why am I considering the stock as a source of passive income?

A quickly recovering dividend stock

A closer inspection of customer activity reveals a promising trend. The adverse effects of Covid-19 on office rentals appear to be evaporating.

The level of customer enquiries, office viewings, and, most importantly, letting agreements has been steadily increasing since March 2020. Before the pandemic struck, the average number of lettings per month sat around 120. In March, that figure plummeted into the low 40s. But in the latest quarterly statement, average lettings between October and December 2020 were back up to 109.

To me, this trend indicates the transition back to office working has already begun. Yet, the share price of Workspace Group remains well below its pre-pandemic levels, even though operational performance appears to be back on track. Simply put, the dividend stock looks too cheap in my eyes.

Generating passive income with dividend stocks can be risky

While real-estate is often thought of as a ‘safe’ investment, it still has a degree of risk. Just look at what happened in 2008. Property values change, and it can have a significant impact on this business. Let me explain.

Workspace Group uses debt facilities to acquire new properties for its rental portfolio. However, a fundamental restriction in these loans is a covenant surrounding the stock’s loan-to-value ratio. If the values of its properties decrease, the ratio increases and subsequently restricts the stock’s ability to acquire more loans.

Another risk worth considering is the level of demand for office space. As Covid-19 perfectly demonstrated, the success of Workspace Group is entirely dependent on this. While I believe that many people will return to an office work environment, I also think that many businesses will continue with a work-from-home scheme even after the pandemic ends. As a result, the value of office space could decline, and with it, rental income.

a cheap dividend stock that generates passive income has its risks

The bottom line

Personally, while these risks are significant, I think Workspace Group could enjoy a nice turnaround in 2021. And pairing that with a 4.7% dividend yield makes it a stock I’d want to have in my passive income portfolio.

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Zaven Boyrazian does not own shares in Workspace Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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