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.

| More on:
Cogs turning against each other

Image source: Getty Images.

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

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
Apr-23$0.0100Slashed distribution by 70%
Nov-23$0Suspended distribution until further notice
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 

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. 

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.

More on Dividend Stocks

A worker gives a business presentation.
Dividend Stocks

TSX Communications in April 2024: The Best Stocks to Buy Right Now

Here are two of the best TSX communication stocks you can buy in April 2024 and hold for years to…

Read more »

Man considering whether to sell or buy
Dividend Stocks

Royal Bank of Canada Stock: Buy, Sell, or Hold?

Royal Bank of Canada (TSX:RY) has a high dividend yield. Should you buy it?

Read more »

Businessman looking at a red arrow crashing through the floor
Dividend Stocks

BCE’s Stock Price Has Fallen to its 10-Year Low of $44: How Low Can it Go?

BCE stock price has dipped 39% in two years and shows no signs of growth in the next few months.…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

Invest $10,000 in This Dividend Stock for $3,974.80 in Passive Income

This dividend stock gives you far more passive income than just from dividends alone, so consider it if you want…

Read more »

Payday ringed on a calendar
Dividend Stocks

This 6% Dividend Stock Pays Cash Every Month

Can a 6% dividend yield help you build a monthly retirement income? An investment made right can help you build…

Read more »

Payday ringed on a calendar
Dividend Stocks

Passive Income: How Much Should You Invest to Earn $1,000 Every Month?

These three monthly-paying dividend stocks can help you earn a monthly passive income of $1,000.

Read more »

Dividend Stocks

3 Dividend Stocks to Double Up on Right Now

Some of these dividend stocks will take longer to recover than others, but they'll certainly pay you to stick around.

Read more »

TFSA and coins
Dividend Stocks

TFSA Passive Income: How Much to Invest to Earn $250/Month

Want to earn $250/month of tax-free passive income? Here are four Canadian dividend stocks to look at buying in your…

Read more »