Real Estate Investment Trusts (REITs) can be a lucrative source of extra income. These firms are immune to paying corporation tax provided that 90% of net earnings are paid out as dividends. And while that can lead to complications, such as an over reliance on debt financing, these enterprises are notoriously cash-generative.
As such, despite the lofty payout ratio, dividends often end up being sustainable. And it’s why I have several of these stocks already in my income portfolio. With that in mind, let’s explore one REIT I think looks like a promising investment candidate for my portfolio in 2024.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
Profiting from 5G
The London Stock Exchange is home to a wide range of telecommunication companies, with BT Group and Vodafone arguably the most prominent. But despite both having potential, neither business is in good shape after suffering years of managerial complacency.
However, a quick glance across the pond reveals Crown Castle (NYSE:CCI) to be an interesting opportunity. The company effectively acts as a landlord for other telecommunication businesses that want to use its vast network of towers across the US. It’s the largest infrastructure company in the country, with over 40,000 cell towers. And yet the stock has been decimated these last few years.
With the American market already largely saturated, the firm’s growth rate has been under pressure. However, underlying cash flows still seem to be largely moving in the right direction due to continued demand from mobile network providers.
Moreover, the rollout of 5G has led to a rising number of upgrades for its towers that’s also sparking some upward momentum in the financials. So much so that its funds from operations actually exceeded analyst expectations in its latest results. So why has the stock been hammered so hard of late?
Unfriendly macroeconomics
As previously mentioned, REITs tend to carry a lot of debt. With so much capital being redistributed to shareholders, reliance on external financing is largely inevitable. And that makes the recent rise in interest rates double-trouble.
Apart from increasing the cost of servicing its financial obligations, the fair value of its real estate portfolio is also taking a hit from higher rates. And it’s led to a lot of paper losses that have dragged the firm’s market capitalisation into the mud.
However, management seems to be navigating through the current economic climate with some resilience. And with interest rate cuts expected to emerge later this year, an upward correction in its asset portfolio could help undo some of its lacklustre share price performance.
Pairing this with a sustainable looking 5.5% yield, the worst may be over for this REIT. And with the continued rollout of 5G technology in America acting as a sizable tailwind, the group’s near decade-long track record of hiking dividends looks set to continue. At least, that’s what I think.
