Why I Won’t Touch This 13% Yielding Dividend Stock With a 10-Foot Pole

If you are considering investing in high-yielding dividend stocks, look beyond the yields into their ability to sustain those dividends.

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Yes, 13%. You read it right. That is the yield on this dividend stock. Even more surprising is the company has suspended its distributions since November 2023. Then how is the stock yielding 13%? It is the way dividend yield is calculated: the last 12 months’ dividend per share divided by the stock price. The stock in question is Slate Office REIT (TSX:SOT.UN). 

Behind the 13% dividend yield of Slate Office REIT

Created with Highcharts 11.4.3Ravelin Properties REIT PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

Slate Office REIT slashed its distribution by 70% in April 2023 as the REIT saw a decline in its occupancy rate. The high-interest rate environment and hybrid work culture encouraged companies to reduce their office space to cut costs. 

While the occupancy declined (to 78.5% in the fourth quarter of 2023 from 81.1% a year ago), interest expense continued to increase. The fair market value of properties also decreased, because of which the REIT’s 2023 net loss widened to $113 million from $16.6 million in 2022. 

MonthSlate Office REIT’s Distribution per ShareNotes
Mar-23$0.0333 
Apr-23$0.0100Slashed distribution by 70%
May-23$0.0100 
Jun-23$0.0100 
Jul-23$0.0100 
Aug-23$0.0100 
Sep-23$0.0100 
Oct-23$0.0100 
Nov-23$0Suspended distribution until further notice
Dec-23$0 
Jan-24$0 
Feb-24$0 
Slate Office REIT’s distributions (March 2023–February 2024)

Slate Office REIT slashed its distributions in November 2023 to keep up with mortgage payments. If you add up the REIT’s last 12 months’ distributions, it comes to $0.1033. The REIT is trading at $0.80 per unit, resulting in a dividend yield of 13% ($0.1033/$0.80). SOT.UN’s stock price fell almost 82% since January 2023 as the fundamentals continued to slide. The situation is not something that is under the REIT’s control. Property prices have corrected, and office REITs are adjusting to the new hybrid work culture.

Why I won’t touch this dividend stock with a 10-foot pole? 

The macroeconomic environment and shift to a hybrid work culture have created a tough business environment for the sustainability of office REITs. They are still finding their ground. To fight this crisis, Slate Office REIT has devised a Portfolio Realignment Plan, under which it will sell its non-core assets that make up 41% of its gross leasable area. 

The REIT will use the sales proceeds to repay debt and have some liquidity. It will continue to hold properties with better occupancy, tenant profile, and cash flow. Slate is doing everything possible to stay in the business. It is selling properties when property prices are falling, which makes me bearish on the REIT. 

Instead of a value stock, it looks like a value trap, as neither the balance sheet nor the cash flows show much strength. I would stay away from this stock and wait and watch if the management sustains the business. 

Not all commercial REITs are a value trap 

Created with Highcharts 11.4.3Slate Grocery REIT PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.ca

While Slate Office REIT is struggling to survive in this environment, Slate Grocery REIT (TSX:SGR.UN) is showing resilience. The latter manages 117 properties in the United States, all leased to grocers. The grocery business is sticky in all economic situations, thus making occupancy rates sustainable. 

The reduced construction activity in the United States has made the REIT’s stores more valuable, allowing it to charge a higher rent. That explains its 10.4% lease spread in 2023. Slate Grocery REIT’s unit price has slipped 25.5% since January. However, it maintained its distributions. Hence, it is offering a dividend yield of over 10%. The Grocery REIT is a better buy than the Office REIT if a high yield is what you seek. 

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Slate Grocery REIT. The Motley Fool has a disclosure policy.

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