I’ve got scope to add another dividend income stock to my portfolio, and I’m hunting for something a little different.
I already have plenty of exposure to high-yielding financials such as M&G and Phoenix Group Holdings. They’ve been paying super-generous dividends while delivering solid share price growth. That’s great news for me, but investing is cyclical, and after such strong runs their share price momentum may be fading.
So I’m casting my net wider and looking at a different sector, real estate investment trusts, or REITs. They can be tempting for income seekers because to qualify as a REIT, a company must pay out at least 90% of its qualifying profits as dividends. Capital growth can come on top, although it’s been in short supply for some time. Is that about to change?
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Landsec shares struggle
Land Securities Group (LSE: LAND) is one of the UK’s largest commercial property owners and developers, with a diversified portfolio of offices, shopping centres and high-street retail. On paper, it ticks plenty of boxes. In practice, the share price has struggled for much of the past decade. After topping 1,000p around 10 years ago, it trades closer to 620p today.
The real damage was done during the pandemic, when lockdown crushed retail footfall and working from home hammered office demand. Rising inflation and interest rates then delivered another blow, pushing up the cost of capital, denting earnings from property disposals, and leaving consumers feeling poorer.
Yet despite all this, underlying rental income has held up reasonably well. Occupancy stands at a robust 97.7%, while rental income rose 5.6% in the six months to 30 September.
Profits slump on disposals
That said, profits have taken a hit. Latest pre-tax profit slumped from £243m to £98m, largely due to a £67m loss on £644m of property sales that generated little or no return. The board is now reshaping the portfolio towards higher-quality assets, but that means enduring some short-term pain.
Landsec is also branching out into residential property. That sector has struggled too, judging by the performance of housebuilders, but falling interest and mortgage rates, combined with Britain’s chronic housing shortage, could elevate the outlook.
I’m not alone in feeling slightly more upbeat, with the shares up 6.5% over the past year. This looks like the early stage of a potential recovery, but the shares still look good value. The price-to-earnings ratio sits at just 12.3, while the price-to-book ratio is a modest 0.7. Although given recent share price performance, Landsec has plenty to be modest about.
Investors will also be wary of net debt of £4.4bn, which sits only just below the company’s market value of £4.6bn.
The dividend is harder to ignore with a chunky trailing yield of 6.5%. The Landsec share price could recover alongside the wider economy, but while there’s potential value here, I’m struggling to argue this is the kind of mispricing that comes along only once in a generation. I’m sticking with my income-paying financial stocks.
