In this article:
Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest.
High-yielding stocks can prove to be a double-edged sword. While they offer the prospect of a very generous income return, in many cases, they have high yields for good reason.
Their shares may have fallen heavily, thereby prompting an elevated yield, due to weak underlying financial performance, an uncertain outlook or because their dividends are not well covered by profits.
Therefore, in Questor’s view, income investors should exercise a significant amount of caution when considering the purchase of a stock whose yield seems too good to be true.
Of course, in some instances, high-yielding shares offer favourable long-term income investing outlooks. For example, real estate investment trust (Reit), Land Securities, has a dividend yield of 7.1pc and improving financial prospects after what has been a hugely difficult period.
It has suffered greatly from the negative impact of higher interest rates on commercial property prices. Over the past two financial years, for instance, its net asset value per share has declined by 19pc as higher borrowing costs have weighed on demand across the sector.
Furthermore, the evolution of working and shopping habits following the pandemic has exacerbated the overall feeling of uncertainty faced by the company.
As a result, its share price has fallen by around 44pc since the start of the pandemic. It now trades on a price-to-book ratio of just 0.6, which suggests investors have priced in a sizable future decline in commercial property prices.
But with the company reporting a return to modest growth in property values in its latest half-year results, its shares now appear to be severely undervalued.
Moreover, the trust’s operating environment should improve over the medium term. Interest rate cuts, while now set to be slower paced than previously expected as a result of the Budget, are nevertheless likely to be implemented in the coming months.
A looser monetary policy ought to have a positive impact on commercial property prices, while bolstering demand among prospective tenants that stand to benefit from an improving economic outlook.
Separately, Land Securities is focusing on higher-quality assets that are more likely to enjoy stronger levels of rental growth and occupancy. Since 2020, the company has made £3.1bn of asset disposals, with its balance sheet being in a relatively strong position to both invest for future growth and overcome near-term economic challenges.