1 Monthly Dividend Stock Down 35% I’d Buy Right Now

Down 35% from all-time highs, Slate Grocery is a quality REIT that offers shareholders a tasty dividend yield of over 10%.

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Investing in monthly dividend stocks that offer high yields is a low-cost way to generate a stable and recurring stream of passive income. However, dividends are not guaranteed and can be cut or entirely suspended, especially if a company’s financials deteriorate. So, it’s crucial to identify quality dividend stocks with strong balance sheets and a sustainable payout ratio before you invest in these companies.

One such monthly dividend stock that offers you an attractive yield is Slate Grocery (TSX:SGR.UN). Down 35% from all-time highs, the Canadian-based real estate investment trust offers you a forward yield of 10.7%. Let’s see why I’m bullish on this TSX stock.

Slate Grocery stock is trailing the TSX

Shares of real estate investment trusts or REITs are down significantly from record highs due to headwinds such as inflation and elevated interest rates. Typically, REITs use debt to fuel their expansion plans, a strategy that worked exceedingly well when interest rates were much lower in the decade prior to 2022.

However, the rising cost of debt results in higher interest payouts, dragging profit margins for Slate Grocery and peers lower in recent months. Due to the ongoing pullback, the Slate Grocery stock is down 13% in the last 10 years. If we account for dividend reinvestments, the TSX stock is up 100% since May 2014. Comparatively, the TSX index has returned 115% to shareholders in dividend-adjusted gains.

Can Slate Grocery stock stage a comeback in 2024?

Slate Grocery is part of a recession-resistant industry as it owns and operates a portfolio of grocery-anchored real estate. In the first quarter (Q1) of 2024, it completed over 770,00 square feet of total leasing, which should result in higher future cash flows.

Moreover, Slate Grocery stated over 98,000 square feet of new deals were completed at 31% above comparable average in-place rent. The REIT giant emphasized that non-options renewals were completed at 15% above expiring rents. Its positive leasing momentum at double-digit leasing spreads has translated to income growth for the company in Q1 of 2024.

Slate Grocery’s net operating income (NOI) rose by US$1 million or 2.5% year over year in the March quarter. It expects NOI to move higher as new leases completed in the last 12 months will now be realized. At a price of US$12.49 per square foot, average in-place rent is still below the market average of US$23.21, indicating it has a significant runway to increase its rents and grow net operating income.

Slate Grocery explained that it continues to prudently manage the REIT’s balance sheets to ensure they remain sheltered against the current interest rate environment. Around 94% of its total debt remains fixed at a weighted average interest rate of 4.4% and an average remaining term of 3.1 years on interest rate swap contracts.

According to Slate Grocery, vacancy levels in the strip centre segment are hovering near record lows as new retail supply spaces remain limited. Further, tenant demand for grocery-anchored stores in key locations is high as grocers continue to see increases in sales and foot traffic.

Several leading grocers, such as Walmart and Kroger, continue to invest in expanding their store count, showcasing the role of physical stores as a local distribution hub.

Slate Grocery’s dividend payout is high

In Q1 of 2024, Slate Grocery reported an adjusted funds flow of US$13 million or US$0.22 per share, which translates to a steep payout ratio of 99%. Slate Grocery needs to generate enough cash flow to reinvest in capital growth, maintain its dividend payout, and reduce its balance sheet debt.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Kroger, Slate Grocery REIT, and Walmart. The Motley Fool has a disclosure policy.

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