Image source: Getty Images
A share offering a 7%+ yield is likely to catch the eye of those looking for an income stock to buy. A steady stream of returns is hugely appealing given the uncertain times in which we find ourselves.
However, the real potential of these types of stocks lies in reinvesting the dividends. Let me explain.
Land Securities Group (LSE:LAND), owner of a £10.9bn property empire, is currently yielding 7.2%. In other words, it’s paying dividends of £72 for every £1,000 invested. That’s a great return for doing nothing. If this was maintained for 10 years, an initial lump sum of £1,000 would produce income of £720 over the course of the decade.
However, if someone reinvested the dividends and bought more shares – often referred to as compounding — the £1,000 would grow to £2,004 after 10 years. That’s a near-doubling and a 16.5% improvement on the return for someone who banked the dividends.
Repeat this for another decade and a shareholding of £4,017 could result.
After 30 years, the £1,000 could be worth £8,051. That’s an astonishing overall return of 705%.
These examples ignore any growth in the group’s share price although, of course, stocks can go down as well as up.
However, dividends can be volatile, especially for a business that’s 100% exposed to the UK commercial property sector. But income investors can take some comfort from the fact that as a real estate investment trust (REIT), Land Securities Group must pay dividends equal to 90% of its annual rental profit.
Threats to its earnings include higher interest rates leading to increased borrowing costs. Also, the group’s in a period of transition – it calls this “capital rotation”.
Until recently, it owned only retail properties and offices. By 2030, it hopes to have over 6,000 homes in the residential sector on its books. It also plans to shift its focus to premier retail destinations and top-tier offices. If all goes to plan, this will deliver a higher return on capital. And the group’s hoping that the income from residential properties will be less cyclical. Otherwise, it will have spent billions with little improvement in its financial performance.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.