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Even with UK shares generating phenomenal returns in 2025, there are still plenty of cheap real estate investment trusts (REITs) offering generous dividend yields in 2026. And among these businesses stands Supermarket Income REIT (LSE:SUPR) with a payout of 7.3%.
That means for every £100, investors can earn roughly £7.30 in annual passive income. And at its current share price, investors can snap up 595 shares, generating an income of £36.60 overnight.
So is this a screaming buy for income investors?
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The bull case
As its name suggests, Supermarket Income REIT owns and manages a portfolio of supermarket and grocery properties that are leased out to some of the largest retailers across the UK and Europe.
Since leases are locked in for decades rather than a handful of years, management enjoys significant long-term revenue transparency. And by implementing annual contractual uplifts, the group’s able to generate a predictable and inflation-resistant income stream that’s paved the way for seven consecutive years of payout hikes.
Needless to say, that’s definitely an encouraging trait for income investors. And with management using its financial strength and cash flows to fund further property acquisitions, the business is steadily expanding its commercial real estate empire.
So is this a no-brainer?
The bear case
The company’s balance sheet remains in good shape. Its loan-to-value ratio does sit at 31%, but the cash flow coverage of its interest obligations remains a very healthy 3.8 times. And management is using this strength to borrow more money as a funding mechanism for its property acquisition pipeline.
However, there are still two primary challenges. The first is that management faces a series of debt maturities over the coming years that might require refinancing or asset disposals to cover. The second is that with grocery retail profit margins getting squeezed by higher labour costs and inflation, rent affordability risk’s on the rise.
With this business only typically dealing with industry titans such as Tesco, the risk of late rental payments seems low. But rent growth could stall as tenants renegotiate slower uplifts when leases are up for renewal. And could have a significant impact on this REIT’s long-term cash flows.
What’s the verdict?
Looking at its latest results, with cash flows gobbled up by interest on outstanding loans, dividend coverage is exceptionally tight. In fact, it stands at 0.98 times as of June 2025. In other words, the company has begun paying out more to shareholders than it’s bringing in, albeit by a small amount.
Over the short term, that’s not necessarily a problem if cash flows later rebound. But in the long run, without improvement, it’s unsustainable. And it does potentially put this stock’s tasty 7.3% yield at risk.
Is it a risk worth considering? For some income investors seeking defensive dividends, it might be. But there are other REITs out there with similar levels of payout that have much stronger dividend coverage. With that in mind, I think these other stocks are more tempting for my passive income portfolio today.
