At a time when the base interest rate is above 5%, I need to be selective when considering income stocks to buy. After all, there’s little value in me buying a stock with a yield of 2% or 3% unless it has an incredibly bright outlook. Naturally, I’m going to have to take on some more risk to get a higher yield. Here’s one stock that I think is worth it, and one that isn’t.
Nothing bland about land
Land Securities Group (LSE:LAND) owns a broad range of commercial properties around the UK, including the famous Piccadilly Lights. Over the past year the share price has increased 9%, with the dividend yield sitting at 6.7%.
Even though the share price has been resilient over the past year, I’d argue this is still a risky stock to consider. The reason is the commercial property sector is very dependant on how the broader economy performs. The UK is treading water at the moment. We aren’t in a recession, but we aren’t seeing strong growth either.
Despite this risk, I believe the reward is there. The yield is generous and the business pays out each quarter. Due to the property sector being cyclical, I’m confident that in a few years time the group will have a portfolio increasing in value, with excess demand from potential tenants.
The other good point to note is that the bulk of the holdings are in major cities. I’d expect demand to be stronger in these areas versus out-of-town centres or residential estates.
Private deals in tech
On the other hand, sometimes the risk just doesn’t stack up. I felt this way when I considered Apax Global Alpha (LSE:APAX).
The company invests in private equity deals, which mostly focuses on providing capital to businesses that aren’t listed on a stock exchange. This can be lucrative, but it’s high risk as it’s sometimes not easy to sell a stake in a company that’s privately held.
The share price is down 2.5% over the past year, with a dividend yield of 6.95%. Even though this is an attractive yield, I think it could be cut.
This is because the firm has 39% exposure in tech and digital companies. Tech has performed well this year, with the artificial intelligence (AI) revolution. But I’m concerned that valuations are quite high and I’m not sure consumer demand is keeping pace.
For example, I’ve seen reports this month saying that demand for Apple products in Asia is down. Further, chip giant TSMC reported a slump in profits in the latest earnings update.
As a result, I think Apax might struggle to generate returns from private equity deals in this sector. This could hamper profits and cause the dividend to be reduced.
I could be wrong here, with this just being a blip for the tech sector. Further, Apax has exposure to other sectors such as healthcare that should be able to provide more steady returns.
The post 1 risky income stock to consider buying, and 1 I’d avoid appeared first on The Motley Fool UK.
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More reading
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Jon Smith has no position in any of the shares mentioned. The Motley Fool UK has recommended Apple, Land Securities Group Plc, and Taiwan Semiconductor Manufacturing. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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