When it comes to dividend income, one of the areas of the market that investors are often drawn to is property. Let’s face it, along with moaning, drinking, queuing, and discussing the weather, the property market is one of our favourite pastimes. Nowadays, most of the larger London-listed property firms tend to trade as Real Estate Investment Trusts or REITs (pronounced ‘reets’).
Win-win
Since 2007, when REITs were introduced in the UK, our largest property firms have converted to REIT status, as profits and capital gains from rental properties are exempt from corporation tax. In exchange for this concession, REITs are obliged to pay out 90% of their rental profits to shareholders in the form of dividends. A win-win I would say.
REITs are traded just like any other company on the stock exchange, and in this respect there is no difference in the way we would go about buying and selling shares, as with other non-REIT property companies. I suspect many investors have been trading shares in Land Securities Group and British Land, our largest property firms for the past decade without even realising they were REITs.
Want to buy a shopping centre?
While both of the above firms have diverse portfolios comprising a mix of commercial, retail and residential assets, blue-chip peer Intu Properties (LSE: INTU) is primarily a shopping centre-focused business. In fact Intu is the UK’s leading owner, manager, and developer of prime regional shopping centres and also has a growing presence in Spain.
The company owns nine of the top 20 most popular retail destinations in the UK, including The Trafford Centre in Manchester and the Lakeside Shopping Centre in Essex. Despite a year of political turbulence and uncertainty, Intu managed to beat market expectations with its full-year results and even went as far as saying that it was confident of achieving an increase in net rental income in 2017.
Like-for-like net rental income rose 3.6% in 2016, with the value of its property remaining unchanged on the year, comfortably outperforming the benchmark IPD retail index, which dropped 4.7%. Despite the current political and economic uncertainties, Intu continues to provide its shareholders with a good level of income with a 5.1% dividend yield on offer at current levels.
Not so healthy
When it comes to income investing, a healthy-looking dividend yield doesn’t always mean a sure-fire winner. Sometimes a company’s yield can be temporarily inflated as a result of a share price collapse. This in turn may be due to a change in a company’s fortunes. Take Capita (LSE: CPI) for example.
The outsourcing giant has been hit hard by a number of setbacks in recent times, including one-off costs incurred on the Transport for London congestion charging contract, and continued delays in client decision-making. To make matters worse, last month the group announced the departure of its Chief Executive after revealing that full-year profits for 2016 had slumped 33%, as well as losing its place among the blue-chip FTSE 100 elite.
Thankfully, the dividend was held at 31.7p per share, but personally I don’t expect any more increases to the payout until the outlook improves. I would ignore the 5.7% yield currently on offer as dividend growth may be hard to come by until the group starts to show signs of a recovery.