A 30% Discount on a Magnificent Dividend Stock You Don’t Want to Miss

What does a 30% discount on a magnificent dividend stock mean to your portfolio returns? And why you don’t want to miss this opportunity.

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Do discounts attract you? Most shoppers wait for the Black Friday or end-of-season sale to make purchases to benefit from attractive discounts. They save up money to spend on the sale. Even the stock market has a huge dividend sale ongoing with some magnificent dividend stocks trading at a 30% discount. 

What does a 30% discount mean for a dividend stock? 

When you buy a stock at a 30% discount, you can participate in the recovery rally. For instance, you buy a $100 stock at a 30% discount for $70. If the stock rallies back to $100, it represents a 42% hike. And if it is a dividend stock, you could lock in a higher yield.

Dividend yield = Annual dividend per share/Share price 

Slate Grocery REIT (TSX:SGR.UN) is trading at $11.04, a 33.5%% discount from April 2022 when the interest rate hike began. If the stock recovers to its April 2022 level of $16.62, your money could grow by 50%. 

Had you purchased the REIT at $16.62, you would have locked in an annual yield of 7.1%. You can now get the same dividend of $1.19 per share for a lesser amount, inflating the dividend yield to 10.7%. 

Stock PriceShare CountCapital Appreciation on $15,000 InvestmentDividend per ShareAnnual DividendTotal Expected Returns
Investing $15,000 in Slate Grocery REIT in April 2022 and April 2024

If you invest $15,000 in Slate Grocery REIT today, you can buy 1,359 units and earn $1,617 in annual dividends at the end of 12 months. You also have a chance to increase your $15,000 investment to more than $22,500 in the long term as the unit price returns to $16.62. 

Three reasons to buy this magnificent dividend stock at a 30% discount 

Now that you know the opportunity a dividend stock brings when buying the dip, it is time to assess risks. Could the stock recover to its average trading price? Are there any risks of a dividend cut or a temporary suspension of dividend payments? After all, dividend payments are at management’s discretion. You can gauge the risk by looking at the following fundamentals of the REIT. 

Can Slate Grocery REIT‘s unit price recover? 

The REIT’s unit price fell in the last two years as rising interest rates increased its interest expense while falling property prices reduced the fair market value of its 117 properties in the United States. A correction in property prices endures for two to three years. Once cheap capital is available, property prices return to their rally. 

In 2022, Slate Grocery acquired several properties, increasing its portfolio from 107 to 117. The new properties and rental spread increased its quarterly rental income from around US$39 million in the first quarter of 2022 to US$51.5 million. Thusly, its unit price surged. However, the REIT kept its distributions unchanged and retained over US$5 million of its rent every quarter to sustain higher interest expenses. Moreover, the fair market value of its property portfolio fell. If Slate were to sell any of these properties in the market, it might fetch a lower amount. Consequently, its unit price fell along with its property price. 

An interest rate cut could ease the interest burden and leave more money in the hands of people and companies to invest and spend. That could once again revive buying activity in the property market, sending property prices and Slate Grocery REIT’s unit prices on a recovery rally. Any new property acquisitions could enhance its unit price in the long term. 

Are there any risks of dividend cuts or suspension? 

The REIT has high occupancy and rental income as almost 50% of its leased area is occupied by grocers and grocery-anchored stores that are sticky even in a weak macro environment. It has retained sufficient rent to cover its expenses. Slate is distributing 99.5% of its adjusted funds from operations after deducting leasing costs and tenant improvements to shareholders. However, this payout ratio will reduce as interest expenses fall and property prices rise.

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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