With the stock market throwing quite a tantrum in 2022, high dividend yields seem to be all around. For many businesses, this is a sign that shareholder payouts may soon be on the chopping block. After all, the slowdown in consumer spending isn’t exactly good news for earnings. And if profits take a hit, today’s high yields could quickly evaporate.
Yet this isn’t the case for every enterprise. In fact, several are seemingly thriving despite what the share price would indicate. And one of which could be a terrific stock to buy now inside an ISA.
A dependable dividend yield?
Real estate is one of the many sectors that have been hit hard lately. With interest rates rising, the cost of debt, and therefore mortgages, has surged. So much so that property values are getting quite a beating. And it’s one that sent the Londonmetric Property (LSE:LMP) share price tumbling by 36% over the last 12 months.
As a quick reminder, this company owns and leases commercial properties across the United Kingdom, primarily catering to the e-commerce industry. The bulk of its portfolio consists of distribution facilities like warehouses with a few grocery and retail parks blended into the mix.
With its property values falling over the past year, the group’s reported earnings are firmly within the red. And the stock price has moved to reflect this, pushing the dividend yield to an impressive 5.4%. But while many investors are viewing this as an income trap, it may actually be a bargain opportunity.
The vast majority of Londonmetric’s tenants are established enterprises with long-lease contracts that have an average length of 12 years. As such, despite the cost-of-living crisis throwing a curve ball at the online shopping sector, occupancy remains exceptionally high at 98.7%!
In fact, management has even been signing on new tenants. And consequently, net rental income – the cash flow used to cover dividends – has increased by 14.1% in the last six months. So it’s no surprise that the company has increased the dividend per share from 4.4p to 4.6p, pushing the yield even higher.
Understanding the risks
Investing in commercial real estate isn’t exactly cheap. And with the company paying out most of its rental proceeds to shareholders in a dividend, it’s racked up a lot of debt over the years.
As of September, Londonmetric has £1.18bn in loans on its books, averaging a 3.2% interest rate. That’s up from 2.6% just six months prior. And if the Bank of England continues to raise interest rates in the fight against inflation, the firm’s debt servicing costs will continue to grow.
With a weighted average debt maturity of 5.8 years, there doesn’t appear to be an immediate solvency problem. However, suppose more rental income is being gobbled up to cover interest on loans? In that case, shareholder dividends may eventually take a hit.
Despite this risk, I remain cautiously optimistic about income-generating capabilities for this business in 2023 and beyond. That’s why I believe investors have a rare buying opportunity to lock in a sizable and likely sustainable dividend yield today.
