For me, investing for passive income is all about boring reliability. The more boring and reliable it is, the more I’m interested.
I reckon the company I’m writing about today, Supermarket Income REIT (LSE: SUPR), could be a good example.
I bought shares in this property firm earlier this year and expect them to provide me with many years of reliable cash payouts.
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Super-reliable income?
Supermarket Income is a real estate investment trust (REIT) that owns supermarket properties.
The company’s focus is on large, high-quality stores — 75% of its rental income comes from Tesco and J Sainsbury.
Tenants like these FTSE 100 retailers are unlikely to default on their rent and will sign long leases to lock in successful stores. Supermarket Income’s average unexpired lease length was 12 years at the end of June 2024.
These attractions are reflected in the company’s record of 100% occupancy and 100% rent collection since its IPO in 2017.
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Why have SUPR shares been falling?
The value of commercial property is generally linked to interest rates.
Higher interests generally cause commercial property prices to fall due to higher financing costs. This is one of the main reasons for Supermarket Income’s 40% share price decline since summer 2022.
The share price chart looks worrying, but on balance I think the stock’s valuation today is much more attractive than it was two years ago.
Buyers can now pick up shares at a discount of more than 15% to the June 2024 net asset value of 87p per share. That’s a useful margin of safety in case market conditions remain difficult.
There’s also the dividend yield. Today’s 8.5% dividend yield is much more appealing to me than the sub-5% yield on offer in June 2022.
Interest rate uncertainty
To be clear, higher interest rates do create some risk. Supermarket Income had net debt of £655.5m at the end of June, representing a 37% loan-to-value ratio.
If higher interest rates make it more expensive to refinance this debt, then dividend payments could get squeezed. I can’t completely rule out the risk of a dividend cut, which would probably trigger further share price falls.
However, my analysis suggests that Supermarket Income’s dividend should stay safe, as long as interest rates don’t rise further.
Fortunately, most investors expect interest rates to fall over the next year. If this happens, the company says lower rates should help to support “earnings and dividend growth over the long term”.
One further piece of good news for me is recent insider buying. The two principals of Supermarket Income’s investment team each spent £200k on shares in September. I’d like to think this reflects a positive view on the outlook for the REIT.
Buying for passive income
Broker forecasts suggest Supermarket Income will pay a dividend of 6.12p per share for 2024.
To generate a £150 monthly passive income, I’d need to buy 29,142 shares. That would cost around £20,750, based on the 71p share price at the time of writing.
In addition to the dividend income from these shares, I’d hope to enjoy some capital gains over time.
Overall, I think this property stock looks a decent choice at the moment for my income portfolio.
