With interest rates on bank deposits and other ultra-safe investments still at rock-bottom levels, it’s no surprise that many British investors have honed in on income stocks of late. And while the FTSE 100 offers a decent 3.79% yield as of July 31, there are plenty of stocks outside the large-cap index generating even more impressive cash returns.
Dorms pay big time
One that’s caught my eye is Empiric Student Property (LSE: ESP), a REIT that lets out 9,398 beds across 95 properties in 29 university towns. The company is aiming for 5p in total dividend payments this year that would equal a 5.3% yield at today’s share price.
The bullish thesis for Empiric is pretty easy to understand. Record numbers of domestic and international students attending British universities equals demand for housing outstripping supply. This is clear in Empiric’s results as it says it’s on track to hit occupancy of 97% for the full academic year. And with limited supply entering the market, the company has plenty of pricing power with like-for-like income up 6% for the 2018/19 academic year, thanks to increased rental prices and longer lease terms.
That said, bearish investors also have valid reasons to doubt Empiric as an attractive investment. The biggest issue is the company’s operational deficiencies that led to a profit warning last year, dividends being slashed and the CEO losing his job. But the company appears to be taking the correct steps to restore profitable growth with gross margins up from 60.4% to 62.3% year-on-year in the six months to June.
With much work still to be done to improve financial performance, Empiric is more of a turnaround story than other student property-focused companies such as GCP Student Living and Unite Group. Yet with its shares trading at nearly a 10% discount to their NAV, while kicking off a very attractive income stream, Empiric is certainly worth a closer look if you’re after dividends.
A hidden gem?
A more unique company kicking off steady dividends is royalty financier Duke Royalty (LSE: DUKE). The £88m market cap firm is a relative minnow, but its management team sees potential to grow both its market cap and the general market for royalty financing as has occurred in other countries such as Canada.
At present, Duke is partnered with four companies in which it has invested between £6.5m and £9m in return for annual payments of between £0.88m and £1.13m (for between 25 years and forever). For closely-held companies, royalty financing can be an attractive substitute to raising debt or bringing in private equity investors as payments are based on future revenue streams, unlike fixed debt payments, and don’t dilute the stake of existing shareholders, unlike private equity.
And for Duke, the benefits are steady income streams that allow it to pay out quarterly dividends to shareholders that add up to a 5.17% trailing dividend yield. Going forward, management sees good potential to further boost payouts as it has just raised £44m from investors. It’s planning to invest some of this in four businesses with which it has signed letters of intent, with the rest held in reserve for future investment opportunities.
Non-resource royalty financing may be unfamiliar to many British investors, but judging by the high initial yields Duke is achieving with its investments, I think the company could be a long-term dividend dynamo worth keeping an eye on.
