Investors on the hunt for a dividend giant might narrow their focus to yield, and that also includes during retirement. However, it’s dependability that should demand their focus instead. Investors want a retirement ally, a dividend stock that will keep paying through thick and thin, ideally increasing over time to keep up with inflation.
So how does one find such a diamond in this rough-and-tumble world of investing? Here’s what to keep in mind before you go calling any dividend stock a true long-term retirement partner.
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Considerations
Investors want a dividend stock that has paid dividends consistently for decades, ideally through recessions, rate hikes, and market crashes. If management continued paying and even raised dividends during tough periods, it shows discipline and a commitment to shareholders. Then look at the payout ratio. A good rule of thumb is 40% to 60% for most sectors, though utilities and pipelines can handle a bit higher due to predictable cash flow. A payout that’s too high leaves little room to reinvest or weather a downturn. Sustainable dividends come from companies that balance returning cash to investors with reinvesting in growth.
From there, look for companies in essential sectors. These businesses provide services people can’t easily cut from their budgets, which helps keep cash flowing even when the economy slows. That essential service also provides balance sheet strength. Low debt relative to earnings and strong credit ratings mean the business can maintain dividends even if borrowing costs rise.
Don’t ignore dividend growth, either. A 5% yield looks nice today, but if the company never raises it, inflation will quietly eat away at your income. A dividend giant should offer a growing payout of ideally 5% to 10% annual growth backed by expanding earnings or a growing asset base. And ideally, that comes at a good price. A reasonable price-to-earnings ratio or a yield above its five-year average can suggest value.
Consider SRU
SmartCentres REIT (TSX: SRU.UN) is a Canadian real estate investment trust (REIT) investing in retail and mixed-use properties. Yet the business is not only focused on owning “old” retail; it’s working on growth via the intensification and development of land assets.
With this in mind, there are several reasons this REIT might catch the eye of someone looking for long-term income. The REIT pays monthly distributions of $0.1542 per unit per month, coming to a yield of 6.9% at writing. Because SmartCentres owns substantial land and is developing mixed-use communities, there is a possibility of rental growth, repositioning of assets, and higher value over time, which supports future distributions and growth.
In fact, earnings support future growth as well. Net rental income during the second quarter came in at $141.3 million, for a 6.1% increase year over year. Furthermore, rent growth rose by 8.5%, with occupancy hitting a solid 98.6%.
Now, no dividend stock is perfect, so there are a few factors that could hurt SRU in the future, so investors should keep watch. Dividend growth has only come in at 0.3% per year over the last five years on an annual basis, so there isn’t a lot of growth there in retirement. The payout ratio is also at 137%, which is higher than we like to see even for a REIT. The intensification and development strategy is appealing, but development is inherently riskier than simply owning previously leased assets. If the development cycle is slow or costly, it could drag returns.
Foolish takeaway
SRU.UN could be a component of a retirement income portfolio if you understand what you’re getting and what you’re sacrificing. For a retiree needing current income, the near-7% yield is attractive. For someone desiring rising income, SRU is less ideal because dividend growth has been minimal and may remain modest. As always, be sure to discuss any investment with your financial advisor before making any decisions.
