High-yield dividend stocks can help you create a stable source of passive income for life. But as dividend payouts are not guaranteed, you need to ensure companies have strong financials, reasonable debt, and a sustainable payout ratio to maintain these payments over time.
One such high dividend stock trading on the TSX is Slate Grocery REIT (TSX:SGR.UN), which currently offers you a yield of 11.2%. Let’s see if income-seeking investors should buy shares of this REIT right now.
Is Slate Grocery a good dividend stock?
Valued at $619 million by market cap, Slate Grocery is a grocery-anchored real estate investment trust (REIT). It owns and operates a portfolio of properties in the U.S. that are leased out to recession-resistant companies such as Walmart and Kroger.
Slate Grocery entered the sector soon after the financial crisis, as it scooped up quality real estate with high-quality tenants at depressed valuations. It then identified properties that were selling for less than their replacement cost and peak value.
Once it acquires a property, Slate Grocery focuses on ways to increase rents, improve lease terms, and drive occupancy rates higher. Similar to most other REITs, Slate Grocery generates income from rents, a significant portion of which is distributed to shareholders via dividends.
Due to its steady cash flows, Slate Grocery pays shareholders a monthly dividend of $0.09833 per share, translating to a yield of more than 11%.
Typically, REITs fund their acquisitions via debt, making investors nervous due to rising interest rates in the last two years. This has meant Slate Grocery stock is currently down over 40% from all-time highs, increasing its dividend yield in the process.
The bull case for Slate Grocery REIT
With $2.4 billion in assets, Slate Grocery ended the third quarter (Q3) with 117 properties south of the border. Its properties are located in 24 states in the U.S., spanning 15.3 million square feet. The grocery sector has showcased its ability to outperform in periods of economic volatility, as it is a defensive asset class with resilient income streams.
All purchase methods, including e-commerce, require physical stores to facilitate the delivery of goods. Moreover, strong tenant demand, low vacancy rates, and limited new construction provide the backdrop for continued rent growth.
Slate Grocery has a high concentration of essential and grocery tenants. Its portfolio consists of the world’s largest, credit-worthy grocers, which include six of the top seven U.S. grocers by market share.
Slate Grocery emphasized that historical leasing spreads have consistently outpaced inflation. Further, its non-option renewal spreads are 11.5% in the first nine months of 2023. Around 25% of leases (in terms of gross leasable area) expire in the next three years, providing it with a significant near-time upside.
Slate Grocery explained that 98% of tenants are on net leases, offering it protection against rising operating expenses.
Slate Grocery ended Q3 with an adjusted funds flow from operations or AFFO of $13 million. Given its monthly dividend, the company’s payout ratio is over 120%, which is not sustainable over time.
Basically, Slate Grocery needs to shore up its profit margins and lower the payout ratio to keep paying shareholders a dividend.
