Dividend stocks continue to be a popular option for investors in Canada these days. High-yielding passive-income stocks can create solid income while you wait for the market to return to normal. The only problem is that a high yield can yield iffy results.
The issue
A high yield can mean that a dividend stock has fallen so much in share price that the yield has climbed higher and higher. So, instead of getting a great dividend, you’re really just grabbing a stock that has a falling share price.
If the share price continues to drop, likely in response to poor earnings especially if it’s happening quarter after quarter, then another bad thing could happen. The company could decide to cut the company’s dividend in response.
Should that happen, suddenly you have a lower share price and a lower dividend yield, and you’re stuck with shares, not knowing when they’ll return to normal. So, is Slate Grocery REIT (TSX:SGR.UN) in this situation or not?
A strong sector
When looking at a real estate investment trust (REIT), there are a lot of things to consider, but perhaps the most important is the sector that it’s in. For instance, many residential and commercial REITs can end up being a lot more up and down. This comes from consumers spending more during times of economic growth and less during downturns.
That’s been the case lately with many commercial REITs in particular. This is why you want to look for stable sectors, such as those in the grocery sector, like Slate REIT. Consumers spend less during economic downturns. On the other, however, Slate REIT has a wide range of grocery-anchored properties across the United States.
So, while one type might not do as well during economic downturns, low-cost carriers should be able to keep up revenue. It will still likely have a bit of problems in the short term, but in the long term, the company should do quite well. And that means it could be quite a good deal.
Getting into fundamentals
So, let’s see whether Slate REIT’s 9.45% dividend yield is worth it as of writing. The stock currently has a price-to-sales ratio of 2.75 and is trading at 0.77 times book value. Shares are down 21% in the last year and have a fair bit of debt. It would take 129% of its equity to pay off all its debts.
Another issue is the company’s payout ratio, which is at 208%. Ideally, investors would want a payout ratio between 50% and 80%. That would mean the company is putting enough aside to support the dividend while not putting more than it can afford. In this case, Slate REIT is putting perhaps too much aside to support its dividend.
While shares have absolutely sunk into oblivion this last year, the stock has seen some positive movement in the last few months. Shares are up 33% in that time! Yet, I would still perhaps hold off at this point. There needs to be a bit more positive reports from earnings and more of an economic turnaround in this case. So, while there is a high dividend yield, I would consider holding off until more positive earnings come through.
