Holding dividend stocks can be risky during the coronavirus pandemic. And even though many companies have kept their dividend payments intact, that doesn’t things will stay that way. The longer the pandemic drags on and impacts the economy, the more of a risk there is that once-safe dividend stocks could become in danger of having to cut or suspend their payouts.
Real estate investment trusts (REITs) that need to pay 90% of their earnings out to shareholders also aren’t safe buys these days, because if their profits take a hit, then they too may be forced to reduce their payouts.
One REIT that slashed its payouts in August
One REIT to recently go that route was Cominar Real Estate Investment Trust (TSX:CUF.UN). In August, the Quebec-based company announced that its monthly distributions for the month of August and payable on September 15 would be $0.03 per unit. Previously, Cominar was paying $0.06 every month to each unitholder. That’s a drastic 50% decrease. With the share price around $7, that means investors today will be earning an annual yield of 5.1%. Prior to the reduction in the dividend payments, the yield would’ve been over 10%.
The company last released its quarterly earnings on August 7 for the period ending June 30. Operating revenue of $160.6 million declined 9% year over year, while net operating income of $72.6 million fell by 18.4%. Its funds from operations (FFO) per unit of $0.19 was also 27% lower than what Cominar earned in the prior-year period. In the earnings release, the company also announced the reduction of its monthly dividend payments, saying they were “to optimize Cominar’s financial flexibility.”
It’s a bit of a surprising move given the company recorded a committed occupancy rate of 93.9% for the quarter. It could be a sign that while things are stable right now, Cominar may be anticipating some more challenging periods ahead.
As of the end of Q2, Cominar collected 75% of its gross rent for the months of April through to June.
Could more REITs be in trouble?
Investors need to be extra cautious of REITs moving forward, as even high occupancy rates alone may not be enough to suggest that things are okay. Anytime a stock is paying a high yield, especially one that’s in double digits, investors need to be aware that a dividend could be in trouble. SmartCentres Real Estate Investment Trust pays a yield of around 9%, and it’s coming off a tough quarter where it reported a net loss of $112 million. In the previous nine quarters, it managed to post a positive profit margin of at least 26%. And with a focus on shopping centres, it’s another potentially risky REIT to be holding onto right now.
Bottom line
Dividend payments are never a guarantee, and even REITs aren’t immune from the effects of COVID-19. The only solution for investors is to keep a close eye on their investments, as things can change at a moment’s notice. And if you’d prefer to avoid the risk related to REITs and their ability to collect rent altogether, you may want to consider investing in utility stocks instead.
