When it comes to building an income portfolio, real estate investment trusts (REITs) can be powerful tools. These enterprises have a solid reputation for regular dividend payments while also being relatively stable.
In recent years, the latter part has been tested on the back of rising interest rates. But while valuations have suffered across the board, it’s not the same story for dividends.
Real estate operators like Londonmetric Property (LSE:LMP) have continued to maintain and even increase shareholder payouts. This firm, in particular, is now sitting on a nine-year hiking streak. And if I were to snap up around 11,800 shares today, I would start earning just over £1,200 a year – or £100 a month.
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Earning £1,200
Buying 11,800 certainly sounds like a tall order on the surface. But at a share price of around 190p, this is the equivalent of a £22,420 investment. That’s certainly not pocket change, but it’s also not an unachievable sum. In fact, even those with just £300 to spare each month could build up to this point in a few short years.
Since going public in 2013, the share price has grown at an annualised compounded rate of 5.2%. Pairing that with an average 4.5% dividend yield gives a rough estimate of a 9.7% total return rate. And investing £300 at this rate for five years yields just cover £23,000 when starting from scratch. In other words, if an investor were to start right now, the rewards could be reaped by 2029.
Dividend security
As lovely as it would be to have an extra 1.2 grand in the bank each year, there are a few caveats to consider in the previous calculation. First and foremost, it assumes Londonmetric Property will continue to deliver the same historical returns moving forward. Sadly, that’s unlikely.
Let’s ignore the fact that past performance is typically a poor indicator of future returns. Even then, the group may struggle to maintain its pace because of one key difference I’ve already highlighted – interest rates.
Between 2013 and 2021, the cost of debt was pretty negligible. That was a massive boon to REITs as most rely on debt financing to fund their property portfolio expansion plans. Londonmetric’s no exception.
The firm’s current cash flows are more than sufficient to cover both its debt and dividend obligations. That undoubtedly puts it in a stronger position compared to many of its peers. However, higher debt costs mean that growth’s likely going to slow compared to the last decade. As such, snapping up shares today to earn £1,200 may take longer than five years.
To buy or not to buy?
The unfavourable interest rate environment is a challenge that all debt-burdened REITs are currently facing. As previously mentioned, that’s one of the main reasons why these stocks have seen their share prices tumble since inflation entered the picture.
But in the case of Londonmetric, occupancy and rental incomes have proven quite resilient to adverse market conditions. With almost all of its property portfolio concentrated in commercial real estate, Londonmetric works mainly with large corporate tenants. That’s provided a helpful boost to income security for shareholders since rent continues to be paid on time. And it’s a trait I don’t see disappearing anytime soon. That’s why Londonmetric, despite the macroeconomic risks, is already in my income portfolio.
