While the UK stock market remains near record highs, plenty of real estate investment trusts (REITs) continue to trade at discounted valuations.
With heavy debt burdens weighing on investor sentiment, many REITs have seen their share prices collapse since 2022. But more recently, the higher quality companies in this sector have started showing early signs of recovery. Some of these businesses have even been boosting shareholder payouts, resulting in impressive yields.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Accelerating growth
Among the list of REITs still expanding dividends stands Supermarket Income REIT (LSE:SUPR). It’s currently the only pure-play in the grocery commercial property sector, and acts as the landlord to most of Britain’s largest supermarket giants, including Tesco, Sainsbury’s, Morrisons, and Asda.
The exclusive focus on grocery retail has proven to be quite advantageous. While higher interest rates have certainly created a few headaches for this leveraged landlord, the UK grocery market has been exceptionally resilient throughout the cost-of-living crisis. And for Supermarket Income REIT, that’s translated into reliable and predictable rental cash flows with leases spanning an average of 12 years.
What’s more, with around 82% of the firm’s leases linked to inflation and a series of successful rent reviews executed in the second half of 2025, annualised rental income has seen a welcome 11% bump from £118.5m to £132m.
Yet with another £398m of capital deployed through acquisitions, this growth appears to be on track to accelerate, paving the way to even more impressive cash flows, dividends, and debt reduction over the coming years.
So is this a no-brainer?
Where is the risk?
At a share price of 85p and a dividend per share of 6.15p, investors have the opportunity to lock in an impressive 7.24% yield. That means a £10,000 investment today not only snaps up 11,764 shares, but also unlocks a £724 passive income in the process.
But if rental revenues are set to expand, why is the yield still so high? There are two primary concerns surrounding this business.
The first is the fear that a prolonged conflict in the Middle East will trigger a new wave of energy inflation, delaying interest rate cuts, and directly putting pressure on Supermarket Income REIT’s balance sheet. The second is the fact that earnings simply don’t cover shareholder payouts right now.
With a loan-to-value ratio of 43% as of this month, a significant chunk of the group’s rental income is being gobbled up by interest, resulting in a payout ratio that exceeds 100%.
Obviously, that isn’t sustainable in the long run. But management doesn’t appear concerned, projecting that the expected future profits from its recent property acquisitions will help close this gap.
So where does that leave investors?
The bottom line
If management’s correct, an incoming surge in earnings will flip the script and see a return of cash-covered dividends. But if this growth fails to materialise, shareholders’ payouts could eventually be put up on the chopping block.
So is that a risk worth taking? It might be.
Given the firm’s strong dividend track record so far, and management’s seemingly prudent approach toward capital allocation, Supermarket Income REIT could indeed be an income opportunity worth exploring further. And it’s not the only dividend stock on my radar this week.
