Buying something just because it’s cheaper than it was isn’t always a good idea. So are these high yields huge opportunities, or will they lead to buyer’s regret?

WPP

So far this year, WPP (LSE:WPP) has been the biggest faller in the FTSE 100. But the result of a 64% decline in the stock since the start of January is a 10.5% dividend yield. 

The firm expects revenues and profits for 2025 to be below the previous year. That’s not a good thing, but the reasons for it are worth looking at more closely. 

In the short term, the challenge is that customers have been reducing marketing budgets in general. WPP can’t directly do anything about this, but I think it should recover over time.

But the bigger challenge for the firm is the shift towards social media and artificial intelligence (AI). Put simply, it means there’s just less for marketing agencies to do.

This looks like a more durable issue for WPP. The firm is investing in its own (AI) platform, but lower barriers to entry mean there’s a real question as to its long-term pricing power. 

As a result, I’m wary about the company’s ability to maintain its dividend. And I think there are more attractive opportunities to research elsewhere at the moment. 

Alexandria Real Estate

Lower biotech funding in the US has seen Alexandria Real Estate Equities (NYSE:ARE) shares fall 45% since the start of the year. But I think this might be an overreaction, making it worth considering.

The firm is a US-listed real estate investment trust that owns a portfolio of laboratories. And while weaker demand has led to higher vacancies and lower rents, it’s not all doom and gloom.

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.

Forecasts for full-year profits have fallen, but the firm expects to make $2.16 per share in the fourth quarter. That’s well above the $1.32 dividend the company pays out.

The trend is the wrong way for investors, but the firm is looking to divest some of its weaker sites to strengthen its financial position. And there are also positive signs for the longer term.

Pfizer has recently committed to heavy investment in US manufacturing and this might drive demand for research space as a side effect. And other firms might well do the same.

The falling share price means there’s a dividend yield of almost 10%. There’s always risk with high yields, but investors should think about whether the market might be overreacting here.

Black Friday sales

In the stock market, we don’t have to wait for Black Friday – there are sales all year round. But as with shopping elsewhere, we shouldn’t buy something just because it’s discounted.

When a stock is trading with a 10% dividend yield – especially if it’s part of a major index – there’s always a reason why. Investors are generally worried about something.

That doesn’t, however, mean they’re right. I think they might be a bit too pessimistic about Alexandria Real Estate and its future prospects, but I also have my eye on other opportunities.

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Alexandra Real Estate Equities (NYSE:ARE) is a REIT that leases lab space to pharmaceutical companies. It’s been hit by the recent downturn in the sector, but I think it’s well worth a look right now.

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.

Pfizer’s deal

The US government has been hostile to pharmaceutical firms. So to avoid the threat of a 100% tariff on imported drugs, Pfizer has agreed to reduce its prices and invest in US manufacturing.

The response from the stock market has been positive. And one of the stocks that received the biggest boost is Danaher, which supplies equipment across the industry.

By contrast, shares in Alexandria Real Estate are down slightly. And there’s definitely a risk that a big investment in US manufacturing might create extra competition.

I think though, that the firm stands to benefit from the pharmaceutical sector as a whole being in a stronger position. So I’m looking at the 6.5% dividend yield as a potential opportunity.

Rental income

The downside to Pfizer’s deal is that it means lower selling prices for pharmaceutical companies. But Alexandria Real Estate’s largely protected from this.  From the firm’s perspective, what matters is that it can attract enough tenants to occupy its properties and that they’re in a position to pay their rents. That’s pretty much it. 

A good illustration of this is the situation with Moderna. The firm has struggled since the end of the pandemic, but this hasn’t been a problem for Alexandria Real Estate. 

Rent collection metrics have been consistently high, despite Moderna being one of the firm’s largest tenants. And this has resulted in consistent dividend growth for investors.

Where are we now?

Alexandria Real Estate currently has 90% of its properties occupied, which is below its long-term average. That’s why investors will want to be aware of the threat of further supply coming online. 

The average lease has around 7.5 years left, which isn’t that long. But among the top 20 tenants – which account for over a third of its total rental income – the figure is closer to 10 years.

Earlier this year, the firm had to issue debt at 5.5% to replace maturing bonds that had a 3.45% interest rate. That’s not ideal, but the path forward looks much clearer on this front. 

Only 9% of the company’s loans are set to expire before 2027 and the prospect of falling interest rates should help with this. So the current position looks much more stable than it did in January.

A dividend opportunity?

Alexandria Real Estate has focused on generating reliable rental income from high-quality tenants. And that’s a strategy that has worked well for passive income investors. 

While Pfizer’s deal with the US government might create additional competition, I think it should also stabliise the pharmaceutical sector. That’s why I view it as a positive for the company.

Over the long term, I expect the stock could be a great source of passive income. And the 6.5% dividend yield is unusually high and worth considering seriously as a potentially attractive entry point.

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When share prices are rising, it can be easy to become too concentrated in the names that are doing well. This, however, is exactly when it’s time to think about diversification.

Stock market rotation

For a long time, US shares have outperformed their UK counterparts. More specifically, the set of stocks known as the Magnificent Seven have generated outstanding returns.

These stocks looked like the only ones worth buying. And I’ve seen more than one fund manager that underperformed in 2024 put this down to not owning Nvidia shares. 

In 2025, though, things have changed somewhat. Nvidia’s share price is down almost 20% since the start of the year and the rest of the Magnificent Seven are also down. 

At the same time, the FTSE 100 has kept climbing. And both institutional and retail investors have started wondering whether it might be time to start diversifying away from US stocks.

In my view, the better time to think about reducing exposures to the likes of Nvidia was when it was at $150, not now that it’s fallen almost 33% from its 52-week highs.

Of course, investors weren’t so keen to sell Nvidia shares when the price kept going up. But this is the big diversification mistake that I’m hoping to avoid in my Stocks and Shares ISA. 

What’s cheap right now?

Instead of shifting away from US stocks, I think now is a good time to be looking at S&P 500 stocks from a buying perspective. And this is especially true in certain sectors.

As a group, US-listed real estate investment trusts (REITs) have fallen around 6% over the last six months. But I think the sector is well worth looking at right now. 

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.

One particularly interesting name is Alexandria Real Estate Equities (NYSE:ARE). The company owns and leases laboratory space to pharmaceuticals companies. 

The stock has fallen 35% in the last six months and its latest earnings report was disappointing. In short, it’s having difficulties renewing or re-leasing its properties when contracts end.

This is partly the result of increased competition. But it’s worth noting that Alexandria’s 20 largest tenants are committed to leases that have an average of 10 years still to run.

The stock currently has a dividend yield of almost 8%, which is very unusual. So long-term investors might think this is a good time to take a look at the stock from a buying perspective.

Building a portfolio

It’s easy to put off thinking about diversification until stocks that have been doing well start falling, but by then it’s often too late. I think this is a situation where it’s best to be proactive.

That means figuring out where there are opportunities to buy stocks that are out of favour with the market. And the US REIT sector looks like a good example at the moment.

Alexandria Real Estate’s specialism means offers something different to other office REITs. And it could be an interesting choice to consider for investors looking to diversify a portfolio.

The post 1 huge diversification mistake to avoid in a Stocks & Shares ISA appeared first on The Motley Fool UK.

At the sector level, I found the results slightly surprising – I had expected technology to be the top performer and real estate to be last. But I was wrong on both counts…

Winners and losers

Surprisingly, technology has – so far – underperformed the S&P 500 average this year. While there have been some outstanding results, there are plenty of stocks – such as Intel – that have fallen sharply.

Equally, real estate has had mixed results. While the sector has a whole has underperformed, companies that are involved in data centres – such as Iron Mountain – have produced excellent results.

The top-performing S&P 500 sector from 2024 has been communication services, where Netflix has had a strong year. Importantly, there have only been a few stocks that are actually down since January.

At the other end, it’s a close-run thing. But as I write this, the healthcare sector has lagged all the others, with Moderna having lost almost two-thirds of its market value this year.

Healthcare and real estate

In general, I like looking for opportunities in sectors that are out of fashion. And that’s certainly true of healthcare, with the US set to appoint a health secretary with controversial views about vaccines. 

The trouble is that forecasting the outlook for drug companies often takes a lot of specialist knowledge. So there’s a high risk of finding a value trap – something that looks cheap but actually isn’t.

Nonetheless, the underperformance of pharmaceutical companies like Moderna gives me a different idea. There’s a stock that isn’t in the healthcare sector, but is adjacent to it. 

A 25% fall in the price of Alexandria Real Estate Equities (NYSE:ARE) this year has caught my attention. The company is a real estate investment trust (REIT) that leases life science laboratories.

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.

Alexandria Real Estate

The stock comes with a dividend yield approaching 5.5%. And while UK investors should be mindful of withholding taxes, I think this could be an interesting passive income opportunity.

While the average lease still has almost eight years to run, the firm does have some expirations coming up in the next couple of years. And the risk of vacant periods has led analysts to downgrade the stock.

Source: Company Q3 Earnings Release & Supplemental Information

Alexandria’s facilities are fairly generic, though, and this should help the company find new tenants if it comes to it. Importantly, they are also in good locations that are important for the industry. 

Occupancy levels and rent collection metrics have also been strong for some time. So while the risk can’t be ignored, I think it’s also important not to overestimate it.

REIT investing

To some extent, Alexandria Real Estate’s shareholders are protected from a downturn in the healthcare sector. Even if its tenants make less money, this isn’t a problem as long as they keep paying rent.

The other side of the coin is that it doesn’t stand to benefit directly from breakthrough treatments. But from a passive income perspective, I think the discounted share price makes the stock one to consider.

The post Here are the best (and worst) S&P 500 sectors of 2024 appeared first on The Motley Fool UK.

Alexandria Real Estate

What it does: The company specialises in creating, acquiring, and managing life science campuses in key innovation hubs.

By Oliver Rodzianko. Alexandria Real Estate (NYSE:ARE) is my favourite passive income investment at the moment. It’s renowned for long-term price growth as well as its juicy 4.5% dividend yield.

Also, it’s currently down nearly 50% from its all-time high, so it doubles up as a dividend and a value investment.

The business has stable tenants in leading biotech, pharmaceutical, and technology companies. This provides stable and long-term lease agreements. The life sciences sector is positioned for continued growth amid technology innovation. Therefore, I’m very bullish on it.

That being said, the concentrated focus on the life sciences and technology sectors makes the company susceptible to downturns in these industries. So, it’s wise for me to not rely solely on Alexandria Real Estate for my dividend income.

I bought the shares earlier in the year, and I’ll be adding to my position regularly as long as the valuation remains appealing.

Oliver Rodzianko owns shares in Alexandria Real Estate

HSBC

What it does: HSBC is a global bank operating in over 60 countries, with a special focus on Asia. Across the globe, it serves over 40m customers.

By Charlie Keough. One of my favourite shares for passive income is HSBC (LSE: HSBA). The stock sports a thumping 7.5% yield. That has been steadily rising in the last couple of years.

That includes a 90% increase last year when its payout rose from 31 cents per share to 61 cents. Alongside that, it completed $7bn worth of share buybacks.

HSBC recently offloaded its Canadian unit. With the proceeds raised, the firm plans to pay shareholders a special one-off 21 cents dividend this year. That takes its yield closer to 10%, making it one of the highest on the FTSE 100.

I do have one main concern with HSBC. It’s heavily invested in Asia and this has caused the bank issues lately. The Chinese economy isn’t firing on all cylinders. It has struggled for growth. As such, HSBC has been directly impacted.

But in the long run, I expect its focus on the region to pay dividends (quite literally!). I hope to add to my position in HSBC soon.

Charlie Keough owns shares in HSBC.

MONY Group

What it does: MONY Group operates savings platform Moneysupermarket.com and cashback site Quidco

By Paul Summers. My investment in Moneysupermarket.com owner MONY (LSE: MONY) a few years ago is still to generate a profit. However, I’ve been more than happy to stay invested for the passive income the company churns out.

This stock yields currently yields 5.7%. That’s far more than I’d get from owning a fund that simply tracked the FTSE 250. But it’s not so high that I’m doubting whether the money will eventually hit my account.

To be sure, the mid-cap operates in a hyper-competitive space. There’s a question mark over how much it can grow from here as well. However, a rise in energy switching as deals get more competitive should help. 

Although it may mean losing that lovely income stream, I also wouldn’t be surprised if MONY was subject to a takeover bid or two in the near future.

Paul Summers owns shares in MONY Group

Realty Income

What it does: Realty Income owns and leases a portfolio of real estate assets, primarily focused on retail properties.

By Stephen Wright. I’ve owned shares in Realty Income (NYSE:O) for some time now. And I don’t anticipate selling them any time soon. 

The company is a real estate investment trust (REIT) that leases retail properties to its tenants. The majority of its business comes from the US.

Operating on a triple net lease basis helps reduce the overall costs – and risk – for the firm. It means tenants pay for things like insurance, taxes, and maintenance.

A couple of its largest tenants – the likes of Walgreens Boots Alliance – have found themselves in trouble lately. And that increases the risk of unpaid rent.

Realty Income has a highly diversified portfolio, though. As a result, the overall impact of any individual tenant getting into difficulties is limited.

For the foreseeable future, I’m looking to keep collecting dividends from the company. It’s been remarkably stable in the past and I think the outlook is decent from here.

Stephen Wright owns shares in Realty Income.

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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.

This business I’ve found offers three compelling selling points for me:

1. A yield of 4%, which is in line with average rental yields in the US.
2. A share price down 40% from its all-time high.
3. Its tenant market, which I consider much less vulnerable than for other REITs. After all, Alexandria Real Estate (NYSE:ARE) leases space to life science and technology clients. These clients are often considered high quality. They engage in long-term leases, providing predictable revenue streams.

A closer look at the opportunity

The company has much stronger revenue growth than net income growth. Part of the reason the share price has taken such a knock recently is those falling net profits.

However, I think this is somewhat temporary. While past returns are no guarantee of future results, the firm’s earnings have been up and down historically, but the shares have continued to outperform massive major US businesses.

Where the firm has really managed to succeed is in growing its free cash flow over time. I think this is the better metric for ascertaining a business’s long-term fundamental value.

After all, profits are one thing, but real cash left after accounting for all of the expenses on this net income on the cash flow statement is what matters most.

Is it good value for money?

The best metric for ascertaining the value of these shares isn’t price-to-earnings. Instead, it’s a measure called price-to-funds from operations. This adjusts for the unique factors of the real estate business, like property appreciation, making it more relevant.

And at this time, Alexandria has a price-to-funds from operations ratio of 14.6. That’s just slightly higher than the industry norm of around 13. That means the shares are reasonably valued, in my opinion, because its financials look slightly better than the wider industry, justifying a slight premium in the valuation.

My core risks

Yet there are some considerable risks with this firm, even though I think it’s still worth my money.

For example, over the past three years, there have been 297,000 shares sold by people working for Alexandria Real Estate. During the same period, none of the insiders have bought more equity.

I find insider sales particularly telling, as they can often signify that those within the company know the firm has seen its best days.

Also, while protected somewhat by strong tenants in life sciences and tech, there’s always the chance of a downturn in these industries. If that happens, investors could face serious losses that are less likely in more diversified real estate firms. This is especially true because Alexandria gets all of its revenue from US tenants.

On my dividend watchlist

But this company looks strong to me. Even considering the risks, my feeling is that it will continue to do well long term.

That’s why it’s on my watchlist for when I next make some investments.

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