With the stock market still recovering from last year’s downturn, dividend yields of many FTSE 250 stocks are up. And for investors looking to capitalise on low prices, there are plenty of lucrative-looking dividend income opportunities.
The FTSE 250 isn’t known for being an income-oriented index. In fact, most of its constituents are small- and mid-cap companies seeking to grow into the ranks of the FTSE 100. That’s why the index as a whole has historically only offered around 2.7% yield, on average.
Having said that, there are always some exceptions. And promising stocks like Warehouse REIT (LSE:WHR) are now offering investors the chance to tap into a 7.5% payout!
Big yields from real estate
The recent interest rate hikes by central banks have made real estate a rather unpopular sector in 2023. Higher interest rates mean more expensive mortgages, which drag down property valuations. For real estate businesses like Warehouse REIT, this turns into a double whammy with increased pressure on profit margins and the value of its property portfolio.
However, looking past the surface-level problems reveals some interesting trends. Despite the cost-of-living crisis putting the brakes on e-commerce, demand for prime-located warehousing space is still rising.
The warehouse operator reported a £1.3m increase in contracted rent as well as a 2.1% bump in occupancy. And these figures are on track to rise further as management finalises negotiations to lease another 350,000 sq ft of space.
Needless to say, these developments indicate good things for the group’s cash flow. And since cash flow is what ultimately funds shareholder payouts, it also bodes well for prospective income investors eying up the 7.5% dividend yield.
Nothing is risk-free
While the firm’s rental performance is encouraging, there are some valid concerns brewing among investors. Warehouse REIT is starting to feel the pinch of rising interest rates. And management has already started disposing of underperforming locations to help shore up the balance sheet.
The rate of these disposals isn’t anything alarming at this stage. And it provided the company with the necessary liquidity to refinance some of its existing loan facilities under more favourable terms.
Subsequently, Warehouse REIT can enjoy superior financial flexibility, alleviating some pressure on dividends. In other words, these financial decisions have improved the sustainability of its yield.
However, that doesn’t mean investors can simply ignore the rising cost of debt. Expanding a real estate empire isn’t cheap. And with interest rates now no longer hovering around zero, future expansion will likely be far slower than what’s historically been achieved.
Nevertheless, with shares trading near a 52-week low despite cash flow remaining largely intact, I can’t help but feel a buying opportunity has emerged, despite the risk. That’s why if I was starting my income portfolio from scratch today, I’d likely invest my first £1,000 into Warehouse REIT.
