A Small Cap With a 12.7% Yield

121 total views

It’s not too often that you find a small cap stock with a high yield. But that’s what we have with The Necessity Retail REIT (Nasdaq: RTL), which calls itself “the preeminent real estate investment trust (REIT) focused [on] where America shops.”

The New York City-based company has 1,057 properties across 48 states, including Lafayette Pavilions in Lafayette, Indiana; Wallace Commons in Salisbury, North Carolina; and Golf Road Center in Schaumburg, Illinois.

There’s nothing like a fat double-digit yield to excite income investors. But can shareholders expect Necessity Retail to continue to pay such an attractive dividend?

Let’s look at the numbers.

To determine dividend safety in REITs, we look at a measure of cash flow called funds from operations, or FFO.

Wall Street expects to see a big jump in FFO when the company releases its full-year figures for 2022, which it should do around the same time you’re reading this email. Analysts expect FFO to rise from $95.3 million to $128.2 million. In 2023, FFO is forecast to rise to $135.6 million.

Chart: The Necessity Retail REIT's Funds From Operations
Assuming the company pays $114.3 million in dividends (as expected), the payout ratio will be 89%. If the dividend stays the same next year, based on the company’s 2023 estimates, the payout ratio would drop to 84%.

For a REIT, anything below 100% is good. REITs must pay out at least 90% of their earnings in dividends. FFO is not the same as earnings, but because of this rule, REITs often pay out most of their FFO in dividends as well.

Necessity Retail REIT began paying a dividend in 2018. Unfortunately, the company cut the dividend in 2020 and has not raised it since then. The current dividend is $0.2125 per quarter, which comes out to 12.7% annually.

We never like to see a dividend cut. That’s an automatic downgrade. But considering how solid the financials look, the dividend appears fairly safe.

Dividend Safety Rating: B

Dividend Grade Guide
If you have a stock whose dividend you’d like me to analyze, leave the ticker symbol in the comments section.

Be sure to check whether I’ve written about your favorite stock recently. Click on the word “Search” in the top right part of the website homepage, type in the company name and hit enter.

Share this Post