Paying out and maintaining an uninterrupted dividend for over a decade is a good way for a company to get on the radar of investors who are looking for a second income.
Such dividend gems don’t exist in large numbers, but that doesn’t mean there aren’t some to choose from in the stock market. Here’s one that could be considered…
Different property exposure
I’m talking about Real Estate Credit Investments (LSE: RECI). It’s a slightly different way of getting exposure to property. Instead of primarily owning buildings, it invests in loans and bonds secured against real estate across the UK and Western Europe. Over the past year, the share price is down 8%, with a current dividend yield of 10.17%.
As far as the dividend’s concerned, it currently pays 3p per share each quarter, or 12p annually. Remarkably, it has maintained an uninterrupted dividend since 2013. Of course, past performance doesn’t guarantee future returns, so it could be reduced going forward. However, that solid track record does count for something.
It can generate a high dividend because it operates more like a specialist property lender than a traditional landlord. Because of the nature of the loans it provides, borrowers are willing to pay higher interest rates for flexible financing. This allows the portfolio to generate attractive yields, supplemented by arrangement and exit fees.
It also uses leverage, borrowing at a lower cost than the returns generated by its investments, which can enhance shareholder returns.
When I put all of this together, if the 3p per quarter payments continue, I can work out the potential second income. With a £12k investment, this could translate to £101.7 on an average month.
Looking ahead
Some will flag as a risk that the latest full-year earnings per share came in below 12p. This meant the company had to use portfolio cash flows alongside earnings to fund distributions. However, the underlying portfolio continues to generate significant income. Management’s also increasingly shifting towards senior loans, which should reduce risk.
The other point worth noting is the potential for profits not only from banking the dividend but also from the share price. The stock trades at a 17% discount to the net asset value (NAV) of the portfolio. In theory, this shouldn’t be as large. So if the share price rallies in the coming year to reduce this gap, it could generate a capital return for the investor alongside the dividends.
There are risks. Defaults could increase, and property valuations could fall. The business uses leverage, amplifying potential losses.
Yet even with these worries, I believe it can be a dividend gold mine for those seeking second income. I have enough dividend exposure at the moment, but investors who don’t could consider this stock.
Should you invest £5,000 in Real Estate Credit Investments right now?
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Jon Smith has no positions in the shares mentioned.
This story originally appeared on Motley Fool
