Please ensure Javascript is enabled for purposes of website accessibility

Is This High Yielder Setting Up for a Dividend Cut?

By Reuben Gregg Brewer - Jan 6, 2014 at 2:57PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Income investors understandably hate dividend cuts -- here's one company that looks like it may be telegraphing just such a haircut.

Gladstone Land (LAND 0.31%) is a relatively new real estate investment trust (REIT) with a unique focus on farmland. It also sports a hefty yield of nearly 9%, paid monthly. But that distribution could be too good to be true.

There's debate about the content value of a dividend. Some Wall Street watchers and academics suggest dividends are a tangible way for companies to show they have good prospects. That's one of the reasons Realty Income (O 0.11%) is so proud of its dividend history, taking the nickname "The Monthly Dividend Company."

Realty's track record of 65 consecutive quarterly divided hikes (paid on a monthly basis) certainly gives the company notable street cred. And the fact that it was able to maintain that streak through the deep 2007 to 2009 recession shows exactly why income investors look to dividends to get a read on a company's future. In fact, if you want reliable monthly income, Realty Income should be a top choice -- but its recent yield is a touch under 6%.

While that's nothing to sneeze at, Gladstone Land's yield is three percentage points higher -- that's a lot of income to leave on the table. And Gladstone not only tripled its distribution in April of 2013, it also announced a big special dividend in early December. While that sounds mighty tempting, you'd be better off staying on the sidelines for now.

Management talking
Another way managements let investors in on what's going on is by actually saying things. For example, relatively new REITs Silver Bay (NYSE: SBY) and American Homes 4 Rent (AMH 0.91%) have both been telling investors that dividends are set to go up in 2014.

Both companies have gone through the process of building notable single-family home portfolios and filling their vacant properties with tenants. In fact, American Homes, which has pretty much stated that it intends to focus on growth over distributions, basically said its $0.05 a share quarterly dividend is a legal requirement. Silver Bay, on the other hand, is trumpeting the maturation of its portfolio as the support for future dividend increases. Unlike American Homes, it hasn't given a hint at how much investors should expect.

That's how companies with good news talk up the future. However, Gladstone seems to be suggesting the opposite -- falling just short of saying it's set to cut dividends. On December 3, the REIT announced a $0.33 a share special dividend. That distribution is "the final distribution of the Company's remaining earnings and profits from prior years." All of which had to be paid out by the relatively new RIET by the end of 2013 for legal and tax reasons related to its REIT conversion.

The question now is if this REIT, which is still working on building its farmland portfolio, can maintain its $0.12 monthly dividend now that it has to be paid out of ongoing results. It doesn't look too good since the company's Funds From Operations (FFO), a metric similar to cash flow, was just $0.03 a share in the third quarter of 2013 -- a period in which it paid $0.36 a share in dividends.

FFO is a rough measure that adds non-cash charges like depreciation back to earnings to give a better picture of a REIT's dividend paying ability. While small FFO shortfalls can be maintained for a period of time, $0.33 a share shortfalls usually don't count as small. That suggests Gladstone's comments in December's special dividend news release are telegraphing a dividend cut.

Reading between the lines
Gladstone Land is cutting a new course in the REIT world by focusing exclusively on farmland. That's a risk in and of itself. Now that it has satisfied its legal requirement from its REIT conversion on the dividend front, it's hard to see how it can maintain its current distribution policy. Watch for a cut, which may actually create a good buying opportunity if investors punish the shares enough. For consistent income, however, stick to a company like Realty Income.

Reuben Brewer has a position in Realty Income. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Realty Income Corporation Stock Quote
Realty Income Corporation
$74.75 (0.11%) $0.08
Gladstone Land Corporation Stock Quote
Gladstone Land Corporation
$26.10 (0.31%) $0.08
American Homes 4 Rent Stock Quote
American Homes 4 Rent
$38.74 (0.91%) $0.35

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.