From the beginning of my investment journey, I’ve been intrigued by dividend-paying stocks. I always liked the idea that I could invest in a quality company that would grow my capital over time while paying me a regular income. Therefore, I’ve been keen to find new opportunities to add to the income-generation portion of my portfolio.
My approach to dividend investing
This approach to investing isn’t straightforward. Previously I tried to buy the highest-yielding shares and hoped this would generate consistent income over the years. Unfortunately, if the company’s share price begins to suffer, this could mean all passive income is offset by capital losses. Consequently this wouldn’t achieve a great deal in the long run.
For this reason, I’ve shifted my focus to real estate investment trusts (REITs). These instruments are more akin to a property investment than a traditional share and often provide a stable dividend yield. A REIT is a company that owns or finances physical property. By using pooled funds from a range of investors, they can allow a steady dividend income to be achieved by owning shares in the company.
New opportunity
In pursuit of this dividend goal, I found myself drawn to Big Yellow Group (LSE: BYG). It’s a REIT that acquires, owns, and manages self-storage facilities within the UK. After a strong rebound from the pandemic, growing 55.6% in 2021, the shares have struggled this year, down over 33%.
The company currently offers a dividend yield of 3.7%, which is forecast to reach 3.8% next year. This is certainly not the highest yield available for a REIT, however the growth and consistency of this dividend is a core factor. It’s been paid consistently for 13 years and has grown for 12 years, which is an encouraging sign. This growth has averaged 8.2% over the last three years, and is expected to be 4% next year. Despite 2023 being below the three-year average, this is a fair level given the share price contraction.
Underlying fundamentals
The finances of Big Yellow Group are also attractive, with low debt levels and strong cash generation. The company has also achieved impressive earnings generation on invested capital, a core indicator of a share’s quality. Furthermore, turnover is forecast to grow by 8.7% next year and has grown by an average of 11% over the last three.
However, it’s important to note that the price-to-earnings (P/E) ratio is currently just under 22, which is relatively high, despite the considerable share price falls fall this year. Additionally, dividend cover, which looks at how easily dividends can be paid out of earnings per share, is just 1.3, which could lead to future dividend reductions.
Nonetheless, I believe this REIT presents an opportunity to access a fair dividend yield, that’s stable and growing. However, I’m not jumping in just yet and am keen to monitor this dividend stock over the next few months, with the aim of adding it to my portfolio in 2023.