I like to keep an eye on some small-cap opportunities that could boost my holding. One penny stock that I currently like the look of is Alternative Income REIT (LSE: AIRE). Here’s why.
Diversified property
Alternative is a real estate investment trust (REIT). REITs are companies that own and operate property that generates income. These properties can vary by type from office blocks, to shopping centres, as well as all types of residential and industrial properties. The attractive trait about REITs is the fact they must return 90% of profits to shareholders, usually in the form of dividends.
One of the main characteristics that grabbed my attention around Alternative is the fact it focuses on alternative and specialist real estate sectors. These include automotive and petroleum, healthcare, student accommodation, education, and power stations, to name a few.
Pros and cons
Straight off the bat, Alternative’s passive income opportunity is enticing. At present, it offers a dividend yield of over 8%, which is a great level of return for a penny stock. Its present dividend yield is more than double the FTSE 100 average of 3%-4%. It is worth remembering that dividends are never guaranteed, though, and can be cancelled at any time to conserve cash.
Next, I’m buoyed by Alternative’s diversified portfolio of property. A reliance on a single sector or area could result in exposure to trading issues and downturns. This could negatively affect shareholder returns. For example, the company has many hotels and student accommodation. Demand for such property could curtail if another global pandemic struck, like in 2020. Back then, many students stayed at home or deferred a year, and many hotels were shut for long periods of time. Alternative’s diversification across many sectors could protect it when one sector struggles. This should ensure a steady flow of income and, in turn, continued returns for its shareholders.
Moving on, Alternative shares look cheap at present, trading for 67p. At this time last year, they were trading for 82p, which represents an 18% decline over a 12-month period.
Finally, the present economic downturn in the UK led by surging inflation and cost-of-living crisis may impact some of Alternative’s properties. For example, hotel bookings may be affected, which could affect revenues and rental payments from its tenants. I will keep a close eye on its financial results to review any shorter term, as well as any future predicted impact here.
A penny stock I would buy
After weighing up the positives and negatives, I have decided that I would be willing to add Alternative Income shares to my holdings, if I had £500 to invest right now.
I believe Alternative Income REIT shares could boost my wealth. The passive income opportunity on offer, and the protection that a diversified portfolio of property ultimately helped me. I am aware of the risks noted too, however, and would keep a close eye on these factors.
