High dividend yields are popular with investors, but those investors need to keep in mind that they can sometimes be too good to be true. A company with a dividend yield that is out of step with its peers can be a good sign, but it can also be a sign that there is an increased risk of a dividend cut.
Still, when it comes to real estate investment trusts (REITs), they are known for having higher-than-average dividend yields. So, it takes a bit more investigation to determine how high is too high when it comes to REITs. Simon Property Group (SPG -0.26%) is a high-quality retail REIT currently sporting a 6.6% dividend yield. Is this yield too good to be true? Let's investigate.
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Simon Property Group is a top retail REIT
Simon Property Group is a REIT that focuses on retail. It owns numerous shopping malls around the country, including those that carry the name Premium Outlets or The Mills. At the end of March 2023, Simon owned or had an interest in 196 income-producing properties. Simon also owns an 80% non-controlling interest in Taubman Realty Group and has a stake in French retailer Klepierre.
The consumer remains in great shape despite the Fed
Despite an aggressive policy of monetary tightening being orchestrated by the Federal Reserve over the past 18 months, consumer spending remains in good shape. The labor market is especially strong, with unemployment below 4% and workers seeing brisk wage inflation. Mortgage and auto delinquencies are well below pre-pandemic levels. While the Fed remains a risk, the economy has been remarkably robust in spite of 500 basis points of increases in the Federal Funds Rate.
Simon's business remains strong. It reported that sales per square foot for its properties reached a record of $759 a square foot for its malls and premium outlets in the first quarter of 2023. In that quarter, occupancy increased to 94.4% compared to 93.3% a year ago. That said, occupancy is still below the pre-pandemic level of 95.1% at the end of 2019. Simon is seeing strong demand for space, and luxury retailers and casual dining restaurants are seeing particularly strong demand.
Simon Property Group recently hiked its guidance and its dividend
Simon Property Group is guiding for 2023 funds from operations (FFO) per share to come in between $11.80 and $11.95. REITs generally use funds from operations, instead of net income, to describe their earnings. This is because depreciation and amortization (D&A) is a big expense for real estate firms. That said, D&A is a non-cash charge; companies don't write a check for D&A. This means net income tends to understate the cash-generating capacity of the company.
Attractive valuation and a good yield
Simon's annual dividend of $7.40 accounts for about 62% of guided FFO per share, which is pretty conservative, especially for a REIT. Simon recently increased its dividend as well, which gives the stock a dividend yield of 6.6%. At current levels, Simon Property Group is trading at 9.2 times its guidance for FFO per share this year.
This is an attractive multiple for a market-leading REIT like Simon. The dividend is well-covered and the stock is worthy of a look, especially from income investors who think the labor market will remain robust.
