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For me, investing for passive income is all about boring reliability. The more boring and reliable it is, the more it interests me.
I think the company I'm writing about today, Supermarket Income REIT (LSE: SUPR), could be a good example.
I purchased shares in this real estate company earlier this year and hope it will provide me with many years of reliable cash payments.
Super reliable income?
Supermarket Income is a real estate investment trust (REIT) that owns supermarket properties.
The company focuses on large, high-quality stores: 75% of its rental income comes from tesco and J Sainsbury.
Tenants like these FTSE 100 Retailers are unlikely to default on rent and will sign long-term leases to ensure successful stores. The average length of Supermarket Income's current leases was 12 years at the end of June 2024.
These attractions are reflected in the company's record of 100% occupancy and 100% rental collection since its IPO in 2017.
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Why has SUPR stock been falling?
The value of commercial property is generally tied to interest rates.
Higher interest rates generally cause commercial property prices to fall due to higher financing costs. This is one of the main reasons for the 40% drop in Supermarket Income's share price since summer 2022.
The stock price chart looks concerning, but overall I think the stock's valuation today is much more attractive than it was two years ago.
Buyers can now purchase shares at a discount of more than 15% to the June 2024 net asset value of 87 pence per share. This is a useful safety margin in case market conditions remain difficult.
There is also the dividend yield. The current 8.5% dividend yield is much more attractive to me than the sub-5% yield on offer in June 2022.
Interest rate uncertainty
To be clear, higher interest rates create some risk. Supermarket Income had net debt of £655.5m at the end of June, representing a loan-to-value ratio of 37%.
If higher interest rates make it more expensive to refinance this debt, then dividend payments could be restricted. I can't completely rule out the risk of a dividend cut, which would likely lead to further declines in the share price.
However, my analysis suggests that Supermarket Income's dividend should remain safe, as long as interest rates don't continue to rise.
Fortunately, most investors expect interest rates to decline over the next year. If this happens, the company says lower rates should help support “long-term earnings and dividend growth”.
Another piece of good news for me is the recent insider buying. The two directors of Supermarket Income's investment team each spent £200,000 on shares in September. I'd like to think this reflects a positive view on the REIT's prospects.
Buy to earn passive income
Broker forecasts suggest Supermarket Income will pay a dividend of 6.12 pence per share by 2024.
To generate a monthly passive income of £150, you would need to buy 29,142 shares. That would cost around £20,750, based on the share price of 71p at the time of writing.
In addition to the dividend income from this stock, I expect to enjoy some capital gains over time.
Overall, I think this stock looks like a decent option right now for my income portfolio.
