Since listing in July 2017, Supermarket Income REIT (LSE:SUPR), which owns a £2bn portfolio of large grocery stores in the UK and France, has increased its annual dividend every year.
In cash terms, it means its payout for the year ended 30 June 2026 (FY26) of 6.18p was 12.4% higher than the 5.5p declared for its very first year, FY18. This run looks set to continue for another year at least.
Indeed, it’s targeting a 2% increase for FY27, which is why it raised its latest (30 September) quarterly dividend from 1.545p a share to 1.575p. And with such a strong track record, it has the potential to deliver significant long-term wealth.
How might that be achieved?
Compounding gains
Based on amounts paid over the past 12 months, the real estate investment trust is currently (1 November) yielding 7.4%. If this could be maintained for 25 years, and all of the dividends received were reinvested in buying more shares, it would turn a £10,000 investment into £59,581.
This would be an incredible result from doing very little other than purchasing a few shares every three months. Of course, dividends are never guaranteed.
But REITs must pay dividends equivalent to at least 90% of their net rental profit to shareholders each year. Otherwise, they lose certain tax advantages.
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.
However, as with any investment, there are risks.
Big borrowings
In common with many REITs, Supermarket Income relies heavily on debt to buy more properties. As a result, higher interest rates could be an issue. Not only would this increase future borrowing costs but it could also put pressure on the group’s banking covenants.
That’s why the group closely monitors its debt relative to the value of its supermarkets. It currently has a loan-to-value close to its self-imposed limit of 45%:
- FY20: 20%
- FY21: 34%
- FY22: 19%
- FY23: 37%
- FY24: 37%
- FY25: 31%
- FY26: 44%
Of concern, finance expenses as a proportion of net rental income have also been rising in recent years:
- FY20: 18.6%
- FY21: 17.8%
- FY22: 18.0%
- FY23: 41.3%
- FY24: 37.3%
- FY25: 41.2%
- FY26: 40.4%
As a consequence, it recently turned to shareholders for £100m when it wanted to acquire an additional nine supermarkets.
Fortunately, investors happily stumped up the money this time. But there’s a finite limit to how much additional cash they’re willing to provide. With limited room for manoeuvre with debt and equity investors, Supermarket Income’s ambitious expansion plans could be thwarted.
Going places
However, despite the challenges that the post-pandemic higher interest rate environment has created, the group has an impressive track record of growth.
Net rental income has nearly quadrupled since FY20:
- FY20: £26.35m
- FY21: £47.94m
- FY22: £72.11m
- FY23: £95.24m
- FY24: £107.23m
- FY25: £113.23m
- FY26: £100.49m
And in July, the REIT announced a successful refinancing of its debt. Its borrowings now have a weighted average cost of 4.4% and importantly, the interest on 98% is either fixed or hedged through to June 2028.
Also in its favour are its blue-chip tenants, an average unexpired lease term of 11 years, 100% occupancy, low overheads and no bad debts.
For these reasons, I think its dividend is secure for now. Admittedly, those looking for capital growth could probably look elsewhere but, in my opinion, Supermarket Income REIT is one of many exciting UK stocks to consider by income investors.
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James Beard owns shares in Supermarket Income REIT.
