Generating cash flow from the stock market is underrated, in my opinion. While asset growth is important, we all have bills to pay. By having investments in dividend-paying shares, I can use the income from my portfolio to fund my lifestyle. That’s a good goal for me to keep in mind.
Safestore is my favourite UK REIT
I’m a big fan of Safestore (LSE:SAFE), which is a real estate investment trust (REIT) that leases storage space in Paris and the UK. I particularly like it because of its positive long-term share price performance, which is rare for REITs. It also has a healthy dividend yield of 3.5%, which it pays biannually, providing that desirable cash flow I’m after.
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Also, the share price is currently down nearly 40% from its all-time high. This means the market is potentially undervaluing the stock, meaning my future returns could be greater.
Furthermore, storage rental companies are resilient in the face of recessions, as customers often still demand storage units during periods of downsizing and tenant default. This adds an element of security, which I like.
Here’s why I’m bullish on Safestore
Analysts view the shares positively, with their average 12-month price target being £9.50, indicating 10% potential for growth from the present price of £8.60. This is based on five ‘buy’ ratings, two ‘outperform’ ratings, six ‘hold’ ratings, and no ‘sell’ ratings.
Also, the company has had no dividend reductions since 2007. If I had bought the shares five years ago, my dividend yield from the investment now would be 7.3%. That’s because the price has risen so substantially since then.
Furthermore, Safestore is well diversified, with storage units in the UK, France, Spain, the Netherlands, and Belgium. Its presence in key cities like London and Paris provides exposure to a vast customer market, and its variety of locations helps to mitigate the risk of an economic downturn in one area.
REITs come with unique risks
The company has a low cash-to-debt ratio of 0.02. This is because the government requires REITs to pay out at least 90% of rental income profits as dividends. This is good for investors seeking cash flow, but it places Safestore in a position of low liquidity. This can stifle strategic redirections the company might want to take to combat macroeconomic challenges that could arise, like a recession or natural disaster.
There is also competition in the UK from the well-established Big Yellow Group, another one of my favourite REITs. This rival firm has a slightly higher dividend yield of 3.6%, but it has grown much less in price over the past 10 years. However, this could change. Big Yellow only operates UK storage, so it could consolidate the British market if Safestore is focused internationally.
Cash is king
At the end of the day, it’s cash that we all use to pay for our livestyles. That’s why I’m a growing fan of dividend investing. The simplicity of a company I’m not active in paying substantial dividends to me regularly is a peace of mind I’m striving toward. Safestore is one option I’m definitely considering buying soon, so it’s high up on my watchlist.
This post was originally published on Motley Fool
