I’d snap up this 9% yielding hidden gem for passive income!

Looking to bolster her passive income, our writer explains why she’s a fan of this stock that seems to be overlooked.

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Alternative Income REIT (LSE: AIRE) is one passive income stock I reckon is going under the radar a bit.

I plan to buy some shares the next time I have some investable cash to spare. Here’s why!

Diversity is the name of the game

Alternative is as a real estate investment trust (REIT). This means it is set up to own and manage property and make money from rental income. The beauty of REITs is that they must return 90% of profits to shareholders. I already own a few REITs for this very reason as I reckon they’re a great way to boost passive income.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Alternative owns an array of properties across a range of sectors. These include hotels, gyms, healthcare properties, industrial properties, and more.

As I write, the shares are trading for 67p. They’re down 9% over a 12-month period from 74p at this time last year. I noticed that despite macroeconomic volatility impacting the shares, since the business posted a trading update in early October, the shares have been heading upwards.

The good stuff

I’m a fan of Alternative’s portfolio diversification. This is because one area could offset another’s weakness. Plus, this diversity can help boost growth aspirations because it can grow its portfolio in a number of sectors, rather than being restricted to just one.

Next, Alternative isn’t a large company. The positive is that even small acquisitions and new additions to the portfolio can have a material impact on the bottom line and potential returns if they’re successful.

Moving on, results released last month for the year ended 30 June 2023 were positive. It showed that operating profit increased by 4.5%, as did the final dividend by 9.9%. Crucially, rent collection looks solid and the dividend looks well covered by earnings.

Looking at potential returns, Alternative’s dividend yield of 9% is higher than the FTSE 100 average of 3.9%. The firm’s earnings have decent protection for a couple of reasons. These could help maintain steady performance and returns. It has inflation clauses inserted to most of its agreements. Next, it also has long-term leases. The average break clause across its agreements is 17 years for the first break opportunity. However, It’s always important to remember that dividends are never guaranteed no matter how well a business is doing.

Risks and conclusion

Alternative’s smaller operations could also present a risk. This is because its limited number of properties – compared to larger REITs – mean it is at the mercy of empty buildings having a larger impact on its balance sheet and payouts.

Another issue I’ll keep an eye on is debt levels. Although they look manageable, supported by a decent balance sheet, they’re due in two years. I reckon Alternative will refinance, but if interest rates are still high, debt could be costlier to service, denting potential payouts.

To conclude, I’m not expecting Alternative shares to make me rich. I reckon it is a solid dividend stock that could boost my aspirations for a second income stream as part of a diversified portfolio of shares.

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.

Sumayya Mansoor has no position in any of the shares mentioned. 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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