It is rare to find a large-cap stock that offers a sustainable dividend yield of nearly 10%. Today, I’m looking at one FTSE 250 that yields just under 8%, and as far as I can tell, the payout is entirely sustainable.
With a dividend yield of 7.8%, shares in pub group Marston’s (LSE: MARS) offer one of the highest dividend yields in the FTSE 250 (top 10).
Usually, I wouldn’t recommend any company with such a high yield as it is generally an indication that the payout is not sustainable. But with Marston’s, it is difficult to doubt the distribution. It just seems as if the market is avoiding the hospitality sector at all costs.
I reckon this view is incorrect. Looking at the underlying fundamentals of the sector, there’s still much to like. For example, despite rising wage and food/beverage costs, companies like Marson’s are managing to offset these higher input costs by cutting costs and diversifying.
It has been investing heavily in its own beer company, acquiring brewers and distributing the products across its pub estate. Total volumes grew 46% in the 42-week period to 21 July.
Alongside these efforts, rising consumer spending has also helped to stem the bleeding. At the end of July, Marson’s reported a 5.2% increase in managed and franchised pub sales for the 42 weeks. New pubs contributed the bulk of this growth. Like-for-like sales growth was 0.3%.
Marston’s isn’t the only company reporting sales growth. Last week peer Greene King said sales expanded 2.8% on a like-for-like basis during the 18 weeks to September 2. Yes, both companies have benefited from the football World Cup, but looking at these figures it seems to me as if the hospitality industry isn’t struggling as much as some analysts seem to believe. With this being the case, I think shares in Marston’s are a steal today, changing hands at just 6.6 times forward earnings.
So, if you are looking for a cheap income play for your portfolio, in my view, Marston’s is certainly worthy of further research.
If Marston’s is not your cup of tea, I’m also intrigued by commercial property play Regional REIT (LSE: RGL).
With a dividend yield of 8.4% (on a forward basis), this company certainly looks attractive from an income perspective. But why is the market ignoring the business? Well, it is difficult to tell. Regional does have some exposure to retail properties, a sector that has had its fair share of negative headlines recently, although the company’s most significant exposures are the office and industrial market. For example, in the middle of last month, the firm announced the acquisition of eight offices located in Hull, High Wycombe, Stockton-on-Tees, Ipswich, Clevedon, Wakefield, Deeside and Lincoln for £31.4m. And today, the company told investors it has just sold an office building in Cheshunt for £17.3m, generating a profit of £3m since acquiring the site in December 2017.
The value of, and income from, commercial property tends to be much more sensitive to economic cycles than residential property. So, this exposure goes some way to explaining the high dividend yield. That being said, the REIT’s tenant base is extremely well diversified and the average yield on its portfolio is in the high-single-digits. With this being the case, I reckon this defensive income play might be worth a closer look.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.