Whenever I see a FTSE stock with a dividend yield above 10%, I always have a look at it in detail. In my eyes, you can find sustainable income paying shares with yields up to 10%. But when it goes above that, things become a little more murky.
So when I saw a 29% yield, naturally I wanted to see what the story is.
Why the yield’s so high
The stock I’m referring to is the Regional REIT (LSE:RGL). The real estate investment trust specialises in offering exposure to the regional commercial property. The portfolio currently is made up of 132 properties with 832 tenants. These are spread all around the UK, but mostly around key cities.
The stock’s down 51% over the past year. This already gives me one indication as to why the yield’s so high. The way the dividend yield is calculated is by taking the paid dividends from the last year and dividing it by the current share price. So the yield can rise either from the dividend per share increasing, or from the share price decreasing.
In this case, I can see that the past few quarterly dividends have stayed the same at 12p. Therefore, the spike’s been due to the fall in the stock.
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Why the stock’s fallen
The main reason for the sharp fall came earlier this summer, when the company was struggling to repay a £50m bond that was maturing. Alongside general cash flow pressures, the management team decided to raise cash via a discounted share offer.
Given that the shares were issued at a steep discount to the share price at the time, the stock naturally moved lower to adjust for this.
It’s true that the raised capital has been used to pay off immediate obligations. But it’s not a great look for the business in general.
Sustainability going forward
In the latest results, its chairman wrote that the board was focused on “maintaining dividend payments to our shareholders”.
The current dividend’s covered by earnings. However, I’m slightly concerned that we’ll see the dividend cut over the coming year. The trust clearly needs to retain earnings to help ease financial pressures. Paying it out to shareholders right now isn’t the smartest decision, in my view.
So even though the dividend yield’s correct and could be an exceptional purchase, I’m cautious about buying now only for the payments to be cut in the future. In fact, I’d also be worried if the business didn’t cut the dividend. That would show me that the management team might not fully appreciate the situation the company’s in.
I could be wrong. If the REIT’s able to secure a high occupancy rate and income’s flowing in, the issues from earlier this year could be quickly forgotten. In that case, the yield I’d be making would be significantly higher than anything else I could buy and would therefore be a wonder investment.
Ultimately though, it’s too high-risk for me so I’ll be staying away.
This post was originally published on Motley Fool
