I believe the secret to a good dividend investment is to identify companies with sustainable payouts, and buy them when they’re trading at attractive valuations.
Today I’m going to look at two FTSE 250 companies whose businesses have a long-term focus built on real assets. Do they have what it takes to deserve a retirement buy rating?
A long-term Brexit winner
One of the market sectors that’s been most heavily affected by Brexit uncertainty is London commercial property. The directors of London-focused group Great Portland Estates (LSE: GPOR) have taken a conservative approach to these risks, selling developments worth £727m and scaling back near-term plans for other new projects.
The impact of these decisions — according to the firm’s 2016/17 results — is that the group’s net asset value fell by 5.7% to 799p per share last year. Net debt has been reduced so that the group’s loan-to-value ratio is just 12.2% — extremely low for a company of this kind.
Notwithstanding these changes, lettings on newly-completed developments meant that Great Portland’s rent roll rose by 13.2% to £109.6m despite these disposals. New lettings this year were at rates 0.6% above those reported in March 2016.
However, the company warns that that rising rental yields “tend to occur ahead of falls in rental values towards the end of a property cycle”. In other words, Great Portland expects rental rates to weaken, possibly alongside further falls in property value.
At about 660p, the shares currently trade at a 17% discount to net asset value. That’s a reasonable entry point, but I think the company’s comments suggest that both net asset value and the firm’s share price could have further to fall.
Great Portland’s ordinary dividend rose by 9.8% to 10.1p last year. That’s equivalent to a yield of 1.5%, which isn’t outstanding. However, the firm’s low-risk balance sheet and conservative management suggest to me that this is an income stock you could buy and hold forever. I’d hold now and buy more if the shares continue to fall.
You may prefer this 5.9% yield
If you’re looking for an asset-backed income stock but need a higher dividend yield, then you may be interested in my next stock.
Renewables Infrastructure Group Ltd (LSE: TRIG) invests in renewable energy assets such as wind farms. The group has a relatively short history, as it only floated on the stock market in 2013.
However, progress so far has been encouraging. The value of the group’s net assets rose by £107.7m to £834.3m last year, outpacing the £92m of new shares issued during the same period. These funds were used to help fund recent acquisitions, such as the Garreg Lwyd Hill Wind Farm in Powys, Wales.
Using stock to raise cash in this way helps to keep borrowing levels down, but it does mean that shareholders run the risk of dilution. What’s happened since 2013 is that rather than rising, the group’s net asset value per share has remained broadly stable at about 100p.
At 111p, the stock trades at an 11% premium to its net asset value. But the 5.9% forecast yield is attractive and looks sustainable to me. This could be one to consider for a pure income portfolio.