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.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Young Asian man drinking coffee at home and looking at his phone
Investing Articles

2 recession-resistant UK stocks I’d buy and hold for a decade!

Our writer details two UK stocks she believes could still continue to perform well in a recession and not feel…

Read more »

Back view of blue NIO EP9 electric vehicle
Investing Articles

Down 31% this year! Is now the moment to buy NIO stock?

NIO stock has moved sharply downwards in the past couple of months. Christopher Ruane likes the business potential -- but…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 dividend stocks I reckon could grow payouts for years to come!

This Fool is looking for dividend stocks and explains why these two picks could be primed to grow their payouts…

Read more »

Arrow symbol glowing amid black arrow symbols on black background.
Investing Articles

Should I buy, sell, or hold my Rolls-Royce shares at £3.50?

This Fool considers what he should do with his Rolls-Royce shares following the FTSE 100 company's excellent full-year results last…

Read more »

Couple working from home while daughter watches video on smartphone with headphones on
Investing Articles

With a spare £280, here’s how I’d start buying shares this March

Our writer reflects on what he has learnt on the stock market to explain how he would start buying shares…

Read more »

Businesswoman calculating finances in an office
Investing Articles

Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying…

Read more »

Investing Articles

What might the recent Aviva share price performance tell me as an investor?

Christopher Ruane looks at how the Aviva share price has performed over the past 12 months and considers whether he…

Read more »

Investing Articles

Down by a quarter, is the BT share price a steal?

The BT share price has more than halved in the past five years. What is holding it down -- and…

Read more »