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The FTSE 100 contains many of the largest companies listed in the UK, by market cap. Some of the more mature members of the index might lack significant growth potential, but they can still be great picks for income generation. Here’s one company I believe is well worth considering right now.
An industry leader
I’m talking about LondonMetric Property (LSE:LMP). It’s a real estate investment trust (REIT) that manages commercial property. It has a spread of target areas, including logistics warehouses, retail parks and supermarkets. Over the past year, the share price is up 10%, with a current divdiend yield of 5.85%.
One factor in the strong performance recently comes from the focus on logistics. The warehouses in this area have been in demand due to e-commerce growth and the increasing need for fast urban delivery hubs. As a result, this has pushed occupancy rates in this division almost to 100%, with strong rental growth potential when leases renew.
Looking ahead, it could benefit from further interest rate cuts here in the UK this year. The lower the base rate, the lower the financing costs are for LondonMetric when it comes to taking on new projects.
Dividends in focus
Typically, the REIT pays out a dividend each quarter. In order to keep the favourable tax treatment that REITs enjoy, a set amount of profits needs to be paid out to investors. Therefore, that’s one immediate reason why I think it’s sustainable going forward.
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Another factor comes from the fact that the management team explicitly targets steady increases in payouts. It calls it a “progressive dividend policy”, which is great as it helps to offset the impact of inflation.
Of course, dividends can’t be hiked if earnings aren’t keeping pace. Yet thanks to the logistics boost, the current dividend cover ratio stands at 1.1x. This means that the earnings per share can completely cover the dividend, with some left over. This is a good sign and shows things aren’t being stretched too far.
The numbers
The share price is currently 211p. In theory, if someone bought 2,844 shares, it would cost just over £6,000. Using the current dividend yield, this would then translate to £351 in income for the coming year. This assumes the dividend doesn’t change.
Interestingly, were this cash reinvested in the stock, it could compound over time. In year five, it could then potentially pay £455 in income, even without any fresh capital from the investor.
Not everything is guaranteed though. A business can drop dividends at any time. In terms of risks, some flag that it’s heavily reliant on large corporate tenants renewing leases. If a major tenant vacates, income could drop.
Even with this concern, I still think it’s a good stock for investors to think about.
