The impressive rise of UK large-cap stocks has dragged the FTSE 100‘s payout to almost 3% – the lowest level since 2011, excluding the pandemic. Yet when looking beyond to smaller- and medium-sized enterprises, the opportunities to earn a higher yield are bountiful.

In fact, there are currently around 60 stocks in the FTSE 250 rewarding shareholders with 5% or more. This includes Hammerson (LSE:HMSO) at 5.5%.

So with almost double the payout, how much money do I need to invest in Hammerson shares to earn an extra £500 each month? And is this even a good idea?

Opportunities in retail real estate

As a quick crash course, Hammerson owns and operates a portfolio of retail and leisure properties across the UK, France, and Ireland. Think modern shopping centres in city hubs like London, Birmingham, Dublin, and Marseille, which collectively receive an estimated 170 million visitors a year.

Despite recent macroeconomic challenges, the company has maintained a robust occupancy of 95%. At the same time, interest rate cuts and rising footfall have help undo some of the property devaluations, lifting its portfolio 11% to £2.96bn as per its latest interim results.

Combining this with recent lease renewals that included rent hikes alongside some recent bolt-on acquisitions, the group’s net rental take also jumped by 10%. And with leases typically spanning an average of four years, these renewed rates provide more transparency for future cash flows.

As such, dividends received a nice 5% bump earlier this year. So far, this all sounds quite promising. And assuming the yield’s maintained, then a £20,000 investment today is enough to get an investor almost 20% of the way towards earning that extra £500 each month.

Risk versus reward

Hammerson isn’t the only real estate income stock offering a high yield right now. The entire sector seems to have some fairly weak sentiment among investors. And to be fair, it’s not entirely unjustified.

Interest rates might be falling, but at the same time, Hammerson‘s having to grapple with elevated debt costs compared to just five years ago.

Management’s been actively refinancing its borrowings to provide some wiggle room, which has pushed its average loan maturity to just over four years. But the group’s still operating with a gearing of 56.4%. That’s not outrageous, but it does push the core loan-to-value ratio to 37.6% – slightly ahead of the group’s 35% target.

Sticky inflation could prolong the rate-cutting scheme by the Bank of England, adversely impacting property values while also putting increased pressure on the excess earnings available to fund the chunky dividend yield.

The bottom line

All things considered, Hammerson appears to be in a relatively solid position. Leadership seems to have a good grip on the company’s finances, and when the consumer spending cycle eventually rebounds, its portfolio and future rent negotiations could both lead to sturdier earnings.

Having said that, there are less leveraged investment opportunities within the real estate sector offering larger dividend yields. Therefore, I’m more tempted by other promising income stocks right now.

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With the shares down in penny stock territory, commercial property giant Hammerson has lost 90% of its value in the past five years.

Real estate pain

Hammerson invests in office property and has a substantial retail real estate portfolio. And even before inflation started soaring, it was hit by the pandemic lockdown.

Earlier in 2023, analysts just couldn’t downgrade their full-year expectations quick enough.

We’ve seen a combination of just about all the things that could go wrong for a commercial real estate firm that’s focused mainly on retail. The pessimism could hardly be worse.

So it’ll be time to buy, then?

The contrarian

Legendary investor Sir John Templeton might have thought so…

When people are desperately trying to sell, I buy. When people are desperately trying to buy, I sell. It has worked out very well over the years

As it happens, some analysts are starting to agree. Barclays is one of the latest to start to lift its price target. At 30p though, it’s not massively above the 24p price, as I write. Still, it’s a start.

Forecasts see Hammerson posting a decent pre-tax profit in 2024. And they see cash flow rising strongly as early as this year. Oh, and lettings in June are on the up.

The City even seems to think we could be on for a return of the Hammerson dividend, with yields in excess of 5%. But what does the company say?

FY turnaround

At FY time, the board told us it has “focused on what we can control – sharper operations growing like-for-like gross rental income and reducing the cost base – delivering a significant increase in adjusted earnings“.

Adjusted earnings gained 60%, although we saw a statutory loss. Adminstration costs fell 17%, and should drop further this year and next.

With a stock like this, it’s got to be mostly about the balance sheet. And that looks to be where the main risk is, with property values downgraded by the end of 2022.

We’re looking at net debt of £1.7bn, down 4%, but still not great. Although Hammerson reported liquidity of £1bn, which seems fine.

Long-term buy?

Further real estate weakness could hit the balance sheet in 2023, and that in turn could send the share price down again. And with inflation refusing to budge and base rates up at 5%, I really could see more gloom before any sustained share price recovery.

But if Hammerson can get through the next 12 months looking good, I think it could turn out to be a good long-term buy now.

So should we follow the bears and let the risks keep us away? Or is this a time for contrarian investors to go against the crowds and buy Hammerson shares?

I’ll leave it with another quote from Sir John…

I can complain because rosebushes have thorns or rejoice because thornbushes have roses.

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Office space and retail property owner Hammerson (LSE:HMSO) is one high-yield dividend stock on my radar today. Should I buy it for its huge forward dividend yield? Or do the risks facing the business in 2023 make it too risky for investors?

Physical retail slumps

Physical retail endured another bruising year in 2022. In fact, there were a whopping 50 store closures every day last year, according to the Centre for Retail Research.

This was up almost 50% on 2021 levels and the highest level for five years. The body said that rationalisation rather than company failure was the main driver for closures “as retailers continue to reduce their cost base at pace”.

It warned that this trend was likely to continue in 2023 too, though it added that “a few big hitters” might also go to the wall.

Dividend growth

This is a big problem for retail property owners like Hammerson. Indeed, City analysts think earnings here will fall 10% next year.

Yet at the same time, those same brokers expect the shopping centre owner to supercharge dividends over the short term. The 0.4p per share payment of 2021 is tipped to rise to 0.7p for last year before rising to 1.3p this year.

Consequently, Hammerson carries an enormous 5.5% dividend yield for 2023. This is comfortably above the forward average of 3.3% for FTSE 250 shares.

Debt concerns

But how realistic is the current dividend forecast? Well, poor dividend coverage casts doubt over the robustness of 2023’s projection. This sits at just 1.4 times for 2023, well below the safety minimum of 2 times.

On the plus side, Hammerson plans another £300m worth of asset disposals by the end of next year. That’s could give it the financial muscle to pay that big dividend City analysts are forecasting.

However, there is, of course, no guarantee that it will get those balance-sheet-boosting sales over the line. The tough economic climate could make it even more difficult for Hammerson to hive off assets, too.

This is particularly concerning given the huge debts the business still has to pay back. Net debt stood at a colossal £1.7bn as of June.

The verdict

The good news is that footfall at Hammerson’s retail properties “consistently exceeds national indices”, it said in November. In fact, third-quarter visitor numbers in the UK and Ireland stood at around 90% of 2019 levels. If this continues then earnings might well surprise to the upside.

But this isn’t a risk I’m willing to take. I’m also worried about Hammerson’s long-term outlook as the growth of e-commerce erodes footfall at physical retail destinations.

On balance, I think there are better FTSE 250 dividend stocks to buy for 2023 and beyond.

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Big rebound

But sometimes I see stocks lifting themselves from such depths, and I start to wonder if I’m looking at a potential bargain buy. Renold (LSE: RNO) is one that has just crossed my path.

Renold shares dipped as low as 4p in early 2020, and the company was worth very little. But since then the price has grown to 24.75p. The company is up to a £56m market-cap now. That’s still a bit marginal, but it’s more respectable.

Renold makes industrial chains and related power transmission products, and it’s been recording falling earnings for years. But results for the year ended March were headlined “Significant revenue and earnings rebound… Record order book… Continued net debt reduction“.

This is still a very small company. And it’s listed on the Alternative Investment Market (AIM), which is less regulated and generally more volatile. So I’m extra cautious. But I think it deserves closer analyisis.

Dividends too

Structural steel specialist Severfield (LSE: SFR) has seen its share price falling over the past 12 months. As I write, it stands at 57.8p.

The company saw earnings dip a little during the pandemic, but not by much. And last week, the firm put out an upbeat trading statement.

Several current contracts are “expected to deliver significant profits in H2“. And Severfield has a “UK and Europe order book which stands at £483m at 1 September“.

The biggest threat seems to be the current economic outlook. I suspect soaring inflation and rising supply chain costs are likely to impact every aspect of the construction industry.

But against that, I think Severfield’s forecast price-to-earnings (P/E) multiple of under nine looks cheap. Especially with dividend yields heading to 6% and above, based on market predictions.

Back to the shops

Hammerson (LSE: HMSO) shares have lost a third of their value over the past 12 months, dropping to 21.7p today.

The landlord invests in commercial properties, including shopping centres such as the Bullring/Grand Central in Birmingham. And just as the pandemic has eased, we now have crippling inflation, reducing the desire to go out spending.

But Hammerson did record a 154% rise in adjusted earnings in the first half, as like-for-like rental income increased 48%.

Disposals helped to get net debt down a little. It still stood at £1.7bn at 30 June though, which is a threat. Still, the company values its property portfolio at £5.3bn.

The dividend situation is a bit confusing. Hammerson declared an interim cash dividend of 0.2p per share, or an enhanced scrip dividend of 2p as an alternative. This should be the last enhanced scrip dividend alternative, so we can’t deduce much about future cash payments right now.

I’d wait to see the second half performance. But if we get back even close to pre-pandemic dividends, Hammerson could turn out to be a buy.

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Rising interest rates

NatWest (LSE:NWG) shares are currently trading at 258p and they’re up 25% in the last three months.

The banking firm declared a total dividend of 16.8p on 29 July. At the time of writing, this results in a dividend yield of around 6.42%.

The company is currently benefiting from rising interest rates in the UK that are now set at 1.75%. These may only move higher, as the Bank of England seeks to control inflation, which is over 10%.

Rising interest rates generally mean that banks can charge more for loans and mortgages, so that could be good news for NatWest. 

This was visible in its results for the six months to 30 June, when the business reported higher-than-expected pre-tax profits of £2.6bn. The consensus was £2.2bn and the result for the same period in 2021 was £2.3bn.

On the flip side, rising rates may be a deterrent for future customers who don’t wish to take on more debt amid the cost-of-living crisis.

Overall though, NatWest expects full-year revenue to grow 25% compared to last year.

A return to shopping centres

Second, Hammerson (LSE:HMSO) recently declared an interim dividend of 2p per share. At the current share price of 24p, this results in a dividend yield of about 7.62%.

It’s worth noting though, that dividend policies can be subject to change in the future.

The shopping centre and real estate investment firm was battered during the pandemic and the share price slumped to just over 4p.   

For the six months to 30 June however, earnings rose by 154% to £51m. Furthermore, there was a 25% fall in net finance costs, which should place the company on a better financial footing. 

Despite this, there’s always the threat that further pandemic variants have a detrimental impact on Hammerson’s operations. In addition, online shopping may negatively affect the business.

Overall though, the group’s portfolio value increased to £5.3bn, with an annual return of 2.1%. 

Greater hiring

Finally, PageGroup (LSE:PAGE) declared an interim dividend of 31.62p per share, which equates to a dividend yield of 7.01%. At the time of writing, the shares are trading at 446p.

The recruitment consultancy firm has reported solid pre-tax profits for the past five years, while reporting a £114.5m pre-tax profit for the six months to 30 June. This was an 80% increase year on year.

Furthermore, revenue grew to £977m. These financial results give me confidence as a potential investor, but I’m always aware that past growth doesn’t necessarily indicate future growth. 

However, it cautioned about a new trend of slowing recruitment by companies as many have reduced their hiring capacity due to economic conditions. 

Despite this, the business stated that it had benefited from wage inflation, because it had received greater fees per hire on average. 

Overall, these three big dividend companies may provide interesting opportunities for income. As such, I’ll add all three to my portfolio soon.

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Real estate investment trust

As a quick reminder, Hammerson is a real estate investment trust (REIT). In simpler terms, it owns and operates income-yielding real estate. It focuses on commercial properties throughout the UK and Europe and has a primary focus on value retail.

A penny stock is one that trades for less than £1. So what’s the current state of play with Hammerson shares? Well, as I write, the shares are trading for 20p. At this time last year, the shares were trading for 39p, which is a 48% drop over a 12-month period.

The bull case

An argument could be made that Hammerson shares could be a long-term recovery play. The shares are dirt-cheap at current levels. For example, the shares are currently on a price-to-earnings ratio of just 13. Furthermore, the shares are on a price-to-book ratio of just 0.4 which indicates the shares could be undervalued.

Next, REITs are designed to reward investors by paying 90% of profits back to shareholders in the form of dividends. These dividend payments could boost my passive income stream. Hammerson’s current dividend yield stands at 2%. It is worth mentioning that dividends can be cancelled at any time, however. They are underpinned by performance and are paid at the discretion of the business.

Finally, the commercial property market has bounced back since the pandemic struck. Many businesses like Hammerson struggled during the pandemic and were unable to collect rent from struggling businesses, which affected performance and returns. With restrictions a thing of the past, footfall and property demand have increased.

Why I’m avoiding this penny stock

I do understand that past performance is not a guarantee of the future. However, when I review Hammerson’s track record, it does not fill me with confidence. It has a consistent track record of losses. Furthermore, when the pandemic struck, it came close to liquidation and had to borrow to keep the lights on. With dividend payments being of the most attractive aspects of a REIT, if Hammerson is consistently recording losses, how can I expect to receive any dividends if there aren’t any profits to return to shareholders? This is not the first penny stock with a chequered past I have come across.

Next, Hammerson’s reliance on the retail sector does not sit well with me either. In recent years, the decline of bricks and mortar retailers has been well documented. This has been due to the e-commerce boom and rise in online shopping. The change in consumers’ shopping habits has not helped either and many well established and well known retailers have had to cease trading.

Overall I believe there are better penny stock options than Hammerson for my holdings. In fact, I own several REITs as part of my current holdings. They are better placed to handle risks, possess a stronger balance sheet, as well as much better performance records. Furthermore they operate in more lucrative markets, away from retail. I will not be buying Hammerson shares for my holdings currently.

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However, due to the risk of investing in these smaller businesses, I am only willing to allocate a slim percentage of my portfolio to penny stocks. As such, only a few make it through the strict criteria I use to analyse opportunities.

Here are two penny stocks I would buy right now for my portfolio. 

Penny stocks to buy for growth 

The first is the commercial property company Hammerson (LSE: HMSO). This business has come close to collapse in recent years, but it has managed to keep the lights on with emergency fundraisings and asset sales. Now, as commercial property prices start to rise from pandemic levels, it looks as if the outlook for the enterprise is improving.

In a trading update issue towards the end of January, the organisation announced that adjusted earnings for its 2021 financial year would range £75m-£80m, ahead of the £60m it previously expected. It collected around 88% of rents due for the period. 

The firm has also gathered 74% of rent due in the first quarter of its 2022 financial year. 

Clearly, the business is not out of the woods yet. It is still struggling to collect rents from tenants and will likely continue to do so as the brick-and-mortar retail sector remains under pressure. It is unclear how long this challenge will last for the business and is probably the most considerable risk hanging over the stock right now. 

Still, with the outlook for the enterprise improving, I would be happy to add the shares to my portfolio of penny stocks. On top of its improving outlook, the shares also look dirt-cheap. They are trading at a price-to-book (P/B) value of 0.6. This suggests to me the market could be overlooking the potential here. 

Profit potential 

Another opportunity where it looks to me as if the market is overlooking the potential of the business is at oil producer EnQuest (LSE: ENQ). 

Even though the price of Brent Crude recently hit a multi-year high of $90 per barrel, the stock is still trading at roughly the same level it was before the pandemic began. And it is not as if the business is not benefiting from the higher oil price. Analysts believe the firm will earn $156m this year and $312m in 2022. Based on these numbers, the stock is trading at a 2022 forward price-to-earnings (P/E) ratio of 1.5. 

These numbers assume the price of oil remains high. If it does not, the company may miss these earnings expectations. This is probably the most considerable risk to my investment thesis at this point.

Nevertheless, even after factoring this risk into consideration, I think EnQuest is one of the cheapest penny stocks on the market at the moment. In my opinion, even a modest improvement in investor sentiment could lead to a significant increase in the company’s share price.

Therefore, I would be happy to add the stock to my portfolio today. 

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In my search this week, I saw two penny stocks that have surged in 2022 already. Here’s what I’d do next.

Cineworld

The first company is Cineworld (LSE: CINE). The share price is 38p as I write, so it’s still firmly in penny stock territory. But the stock’s rallied almost 19% already this year. However, over one year, the stock is down a quite miserable 41%. Is the recent share price surge just a ‘dead cat bounce’?

The first thing I noticed when researching the stock is that there’s been no update on trading from the company recently. The recent share price surge can’t be explained by positive updates from Cineworld.

However, there was an update on 15 December. In it, Cineworld said it has been ordered to pay C$1.23bn in damages to Cineplex over a breach of contract. This is hugely damaging to the company as its current market value is only £521m.

But what about forecasts for this year? Cineworld is expected to grow revenue by over 100% in 2022 to £3.95bn. Earnings per share (EPS) are expected to swing from a loss back to 2.41p, which would value the shares on a price-to-earnings ratio of 21. I think this reflects the boost in demand the company might see if Covid subsides.

However, all things considered, there are too many risks here for me to want to buy the stock. Therefore, I do view the recent share price rally as a bit of a false dawn.

Hammerson

The next company is real estate investment trust (REIT) Hammerson (LSE: HMSO). Its current share price is 36p, which has popped 8.7% already in 2022. The stock’s also rallied a huge 50% over one year.

Hammerson specialises in managing and developing retail properties in the UK and mainland Europe. Unfortunately, the company suffered substantial losses during the pandemic. The retail sector was severely impacted by Covid restrictions, which reduced Hammerson’s rental income.

The company may be turning a corner though. EPS are forecast to increase by 32% this year, which is a huge turnaround from the heavy losses endured through the pandemic. Hammerson shares are also valued on a price-to-net-asset-value of only 0.6. This looks cheap to me, but it may be signalling further trouble in the retail sector due to continuing Covid restrictions.

I’m in favour of adding REITs to my portfolio for diversification though. They can also be excellent investments to grow my passive income. I do note that Hammerson has considerable debt on its balance sheet, which heightens the risk of any investment. Nevertheless, the stock looks very cheap today. I’m going to keep this on my watchlist for now to see how the retail sector recovers in the months ahead.

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Hammer to fall?

Shopping centres operator Hammerson (LSE: HMSO) offers mighty all-round value today. Its 4% dividend yield for 2022 is more than  double the FTSE 250 average. Meanwhile, City predictions of a 44% earnings rebound next year leave the company trading on a forward price-to-earnings growth (PEG) ratio of 0.4.

A reading below 1 suggests a stock could be undervalued. But even this low valuation isn’t enough to encourage me to invest today. Shoppers are deserting physical retail in their droves again as the Covid-19 crisis worsens. Springboard data shows footfall at Britain’s shopping malls down a whopping 32.9% on Sunday versus two years ago. Things are bound to get even stickier for Hammerson and its retail tenants if the government tightens coronavirus restrictions too.

Turnaround plans

On the positive side, Hammerson has been making considerable progress to bring its debt mountain down. It’s raised an extra £92m thanks to the sale of six assets since the halfway point of 2021, it announced last week. That said, the amount of debt the business continues to hold is colossal. And I worry that this could push it back to the brink if shoppers stay away from its retail destinations. Hammerson had net debt of £1.9bn as of June.

The company’s drive to focus on cities with strong economic and population growth may well deliver meaty profits growth over the long term. So could its decision to move away from pure retail and towards providing a more ‘social’ experience for visitors. But this isn’t something I’m prepared to take a chance with right now.

A 5.4% dividend yield I’d rather buy

I’d much rather spend my hard-earned cash on gold-mining stock Centamin (LSE: CEY). There are plenty of reasons why I think precious metals prices could soar in 2022. First and foremost is a prolonged period of high Covid-19 infections that might derail the economic recovery. Then there’s the global inflationary bubble that analysts are tipping to worsen before it gets better. China’s sharply-cooling economy and weakening property sector are other reasons why safe-haven assets like gold could gain momentum.

I’d prefer to buy a gold-mining share like Centamin rather than snap up physical metal or invest in a gold-backed financial product like an ETF. Okay, doing this exposes me to the unpredictable nature of metals mining where production issues can have significant consequences for a company’s bottom line. But I believe the possibility of big dividends can offset this problem.

And Centamin does offer huge income opportunities for 2022 and beyond. This FTSE 250 firm has a big 5.4% dividend yield for next year. It also offers decent value from an earnings perspective, the digger trading on a forward price-to-earnings (P/E) ratio of around 12 times. This is one of the big-dividend-paying UK shares I have my eye on today.

The post 4%+ dividend yields! Should I buy these cheap UK shares for 2022? appeared first on The Motley Fool UK.

REIT

Hammerson is a real estate investment trust (often referred to as a REIT). This means it owns, operates, or finances income generating real estate. Hammerson owns and operates commercial properties throughout the UK and across Europe including in France and Ireland. The majority of its property assets are retail.

Hammerson nearly collapsed last year in the wake of the pandemic. The recent e-commerce boom, an issue for retail prior to the pandemic, as well as restrictions and retail closures that forced many firms to close, led it to the brink of collapse. Rent collection also became tougher during the pandemic period. Recent signs from larger REITs indicate commercial property demand is on the up and rent collection seems to be back to pre-pandemic levels.

Penny stocks are those that trade for less than £1. As I write, Hammerson shares are trading for 31p per share. A year ago, shares were trading for 21p, which is a return of 47%.

For and against

FOR: Hammerson recently reported positive performance in its latest trading update at the end of October. It reported that footfall throughout its retail portfolio was approximately 15%-20% lower than pre-pandemic levels. In the UK, however, it had surpassed pre-pandemic levels. Rent collection for FY 2020 was 94% and 2021 year-to-date stood close to 80%. I am buoyed by this and think the upward trajectory in performance, footfall, and rent collection could continue.

AGAINST: I understand past performance is not a guarantee of the future but I use it as a gauge. Hammerson does not have the best track record of performance, with consistent losses reported over the past few years. Losses are usually a red flag for me. It is not uncommon to see penny stocks record losses consistently. 

FOR: A recent commercial property market survey indicates that the market as a whole is on the up. As a Foolish investor for the long term, I am not expecting huge returns overnight from my investments but should be patient to gain some returns in the longer term. Hammerson is in a good position to benefit from any upward trajectory in the market. It has a good footprint throughout several countries. Also, pent up demand to get out and shop after the pandemic and restrictions should boost footfall.

AGAINST: Hammerson faces some major competition and there are other REITs out there that possess a larger footprint and have more diversified property portfolios. Two that come to mind are British Land and Landsec. The retail-rich nature of Hammerson’s portfolio does not fill me with confidence. The threat of further restrictions, especially after another new variant of the virus has the world on alert, is not a good sign for retail outlets.

Better penny stock options

After carefully reviewing the options I would not add Hammerson shares to my portfolio right now. Its track record does not fill me with confidence and loss-making firms are ones I usually avoid. In addition to this, the future of retail due to the pandemic and e-commerce boom is too uncertain for my liking. I believe there are better penny stock options out there for me that will offer me more consistent and generous returns.

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