By hand-picking individual stocks, income investors can earn significantly greater dividend yields compared to following a passive index strategy. And that means the amount of money needed to earn an extra £500 each month is much lower.
The impressive rise of UK large-cap stocks has dragged the FTSE 100‘s payout to almost 3% – the lowest level since 2011, excluding the pandemic. Yet when looking beyond to smaller- and medium-sized enterprises, the opportunities to earn a higher yield are bountiful.
In fact, there are currently around 60 stocks in the FTSE 250 rewarding shareholders with 5% or more. This includes Hammerson (LSE:HMSO) at 5.5%.
So with almost double the payout, how much money do I need to invest in Hammerson shares to earn an extra £500 each month? And is this even a good idea?
Opportunities in retail real estate
As a quick crash course, Hammerson owns and operates a portfolio of retail and leisure properties across the UK, France, and Ireland. Think modern shopping centres in city hubs like London, Birmingham, Dublin, and Marseille, which collectively receive an estimated 170 million visitors a year.
Despite recent macroeconomic challenges, the company has maintained a robust occupancy of 95%. At the same time, interest rate cuts and rising footfall have help undo some of the property devaluations, lifting its portfolio 11% to £2.96bn as per its latest interim results.
Combining this with recent lease renewals that included rent hikes alongside some recent bolt-on acquisitions, the group’s net rental take also jumped by 10%. And with leases typically spanning an average of four years, these renewed rates provide more transparency for future cash flows.
As such, dividends received a nice 5% bump earlier this year. So far, this all sounds quite promising. And assuming the yield’s maintained, then a £20,000 investment today is enough to get an investor almost 20% of the way towards earning that extra £500 each month.
Risk versus reward
Hammerson isn’t the only real estate income stock offering a high yield right now. The entire sector seems to have some fairly weak sentiment among investors. And to be fair, it’s not entirely unjustified.
Interest rates might be falling, but at the same time, Hammerson‘s having to grapple with elevated debt costs compared to just five years ago.
Management’s been actively refinancing its borrowings to provide some wiggle room, which has pushed its average loan maturity to just over four years. But the group’s still operating with a gearing of 56.4%. That’s not outrageous, but it does push the core loan-to-value ratio to 37.6% – slightly ahead of the group’s 35% target.
Sticky inflation could prolong the rate-cutting scheme by the Bank of England, adversely impacting property values while also putting increased pressure on the excess earnings available to fund the chunky dividend yield.
The bottom line
All things considered, Hammerson appears to be in a relatively solid position. Leadership seems to have a good grip on the company’s finances, and when the consumer spending cycle eventually rebounds, its portfolio and future rent negotiations could both lead to sturdier earnings.
Having said that, there are less leveraged investment opportunities within the real estate sector offering larger dividend yields. Therefore, I’m more tempted by other promising income stocks right now.
