Earnings season continues, and it’s not just the Big Tech names that people should be watching. Especially for Canadian investors who continue to be so interested in dividend stocks.
In fact, there was one real estate investment trust (REIT) that received some bad news this week, sending shares down about 4% on earnings. But never fear! Today, we may go over why you want to avoid this stock. Yet we’ll also give another option.
Dividend stock to avoid
Shares of Allied Properties REIT (TSX: AP.UN) dropped this week as the company came out with second quarter earnings that were less than thrilling.
The company reported several key factors that led to the drop. Funds from operations (FFO) and adjusted funds from operations (AFFO) per unit were down 10.6% and 11.1%, respectively, compared to the same quarter last year. This decline was attributed to the impact of recent portfolio-optimization transactions, which temporarily pressured these metrics.
Furthermore, operating expenses rose significantly, with a notable increase in general and administrative expenses by 55.3% due to a fair value adjustment on unit-based compensation plans.
The fair value loss on investment properties contributed to lower net income and comprehensive income, which was $28 million compared to $126 million in the same quarter last year. Plus, despite efforts to reduce debt through property sales, the total indebtedness ratio increased, impacting overall financial stability.
More to come?
What’s more, it might be the beginning of more trouble for Allied stock. The REIT could see continued increases in general and administrative expenses or unexpected costs related to property maintenance. Even upgrades could further erode profitability.
Allied also has significant debt maturing in 2025. Any difficulties in refinancing this debt or unfavourable terms could strain the company’s financial position. Add in the immense competition in commercial real estate, and the future looks uncertain to say the least.
So despite offering a 10.2% dividend yield, note the company’s payout ratio at an insane 399%. That dividend is being pushed to the brink, and likely about to burst.
A dividend stock to buy
While Allied stock may have a tarnished future, Granite REIT (TSX: GRT.UN) looks bright. The company is due to announce earnings on August 7, but there are still many reasons to remain positive about the company’s future.
During the first quarter, net operating income (NOI) increased to $114.5 million from $107.4 million in the same quarter last year, driven by higher rental revenue and property acquisitions. FFO was also up slightly to $84.6 million, with its occupancy rate strong at 98.5%!
This reflects the continued high demand for logistics and industrial properties. What’s more, the company completed acquisitions totalling $300 million, expanding its portfolio in strategic markets.
It’s likely we’ll continue to see more of this in the second quarter, with the stock remaining a strong option. This will involve more acquisitions, occupancy growth, and expansion. Meanwhile, it offers a secure 4.4% dividend yield. One supported by a 95% payout ratio. While still relatively high, it can still be supported during this time.
Bottom line
A dividend yield over 10% can look incredibly appealing. But only if that dividend can be maintained. In the case of Allied stock, that really doesn’t seem to be the case. The REIT is struggling, and that could mean investors are in for a cut in the future.
Meanwhile, Granite stock may have a lower dividend, but it’s secure. The company holds strong expansion and earnings growth, with a whopping 40.7% profit margin! And with industrial properties continuing to be in high demand, that doesn’t look like it will slow down any time soon.
