Dividend payments can help me make a passive income from my holdings. With this in mind, I am on the lookout for dividend stocks. One under-rated pick I currently like for my holdings is Segro (LSE:SGRO). Here’s why.
Property boom
Segro is a UK real estate investment trust (REIT) that is one of the largest warehousing and industrial property players in the UK. REITs are designed to return a good chunk of profits back to investors as dividends. These dividends help potential investors like me make a passive income.
As I write, Segro shares are trading for 1,309p. At this time last year, the shares were trading for 973p, which is a 34% return over a 12-month period.
Risks of investing
The obvious risk with any dividend stock is that dividends can be cancelled at any time. This could be due to poor performance or market issues as well as a number of other factors. Dividends are not guaranteed.
Segro’s focus on warehousing space is one of the main reasons I like it. This is due to the burgeoning demand for industrial and warehousing space.
There are many more firms attempting to capitalise on this lucrative market and lots of money is being pumped into industrial and warehousing property in the UK. The risk with any market that could be oversupplied is that performance and returns, of a firm like Segro, could be hurt and affected. This could mean shareholder returns could be affected, and thus, any passive income I hope to make.
Under the radar passive income option
There are many dividend stocks out there that boast an enticing dividend yield. But sometimes, a high yield can be deceiving, and it can be an indicator of a company in trouble. Instead, I like to look at a stock’s fundamentals when looking for passive income options. In regards to Segro, I can see it has a yield of just below 2%. But, it has a good record of dividend payments and growth year on year. Between 2016 to 2020, the dividend has increased from 13p per share, to 20p. I do understand that past performance is not a guarantee of the future, however.
Is Segro currently performing well enough for me to believe dividend payments will continue in the future? Well, a Q3 update released in October made for good reading. It reported that rent was up compared to the same period last year. As were pre-let rent agreements. Vacancy rates had also dropped and customer retention was up.
The main reason I like Segro is the growth market it is operating in. The e-commerce explosion, especially since the pandemic, has seen the demand for warehousing and industrial property outstrip supply. Segro is one of the biggest operators in this market and can capitalise on this growth sector. This should help boost performance and any passive income I hope to make.
Overall, I think Segro could be a good addition to my portfolio. It is a leading player in a burgeoning growth market. Furthermore, at current levels, the shares look cheap with a price to earnings ratio of just 6. A dividend yield of less than 2%, operating in a boring but lucrative market and its cheap price lead me to class it as under the radar. I would add the shares to my holdings now to help me make a passive income.
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Jabran Khan 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.
