Last Thursday (18 December), the Bank of England committee decided to cut the base interest rate to 3.75%. With interest rates at the lowest level in three years, some income investors are looking to dividend stocks to generate a higher yield. Of course, buying stocks is riskier than keeping cash in a savings account, but here are two options with very generous payouts.
Shopping around
First up is the Supermarket Income REIT (LSE:SUPR). The current dividend yield is 7.68%, with the stock price up 19% in the past year. As the name suggests, it makes money by owning large supermarket properties and leasing them to the UK’s major grocery operators. These are typically on long, inflation-linked contracts. As a result, the payments are pretty stable, rising over time.
In terms of banking sustainable income, I’d say having supermarket operators as tenants is a big plus. These are typically defensive stocks in their own right, as demand for basic food and produce remains steady regardless of the state of the economy. The REIT benefits from this as, if the supermarket is doing well, it’ll pay the rent on time.
It has a dividend cover of 1, which is another positive. This means that the current earnings per share can completely cover the latest dividend per share. As a result, it does not have to dig into retained earnings in order to pay out income. This makes it more sustainable than some of its peers.
One concern is the concentration risk of tenants. As it mostly services a few large companies, it’s exposed if one of them decides to cut back on operations. If it had a large number of smaller occupiers, the demise of one wouldn’t have as large an impact.
A niche lender
Another option to consider is BioPharma Credit (LSE:BPCR), with the stock up 9% in the last year. The specialist investment company has a dividend yield of 7.69%. It provides debt financing to pharmaceutical and biotechnology firms. Approved or late-stage drugs with established cash flows typically back the loans.
As a result, the trust generates income primarily from loan interest payments. These predictable, recurring cash flows from the loan book support the dividend.
Some may be concerned that this is a risky business in terms of operations. It’s true that if a company goes bust, it could hurt BioPharma. However, the credit risk is limited due to several tactics. For example, the company does lending against assets with proven or near-term commercial value. It’s not basing the loans on early-stage or really speculative ideas.
Further, it has conservative loan-to-value ratios, meaning that it doesn’t stretch resources too thinly. Finally, the loans are classified as senior lending. This means if a company does go bust, BioPharma is high up on the list of creditors to be paid back first.
I think the dividend is sustainable going forward. The dependability of the income is primarily a function of the borrower’s credit quality rather than market conditions. So as long as the management team make good calls, I’m not too concerned.
Granted, this is a higher-risk industry than more traditional dividend options. But with a dividend yield well above the base interest rate, I think it’s worth considering by investors.
