With a low valuation and 5.2% dividend yield, is this the best income stock on the S&P 500?
I don’t usually look to the S&P 500 when hunting for stocks with a high dividend yield. Many American giants tend to prioritise share buybacks over hefty payouts. But every so often, a company stands out. Right now, one that’s firmly on my radar is VICI Properties (NYSE: VICI), an American real estate investment trust (REIT) based in New York.
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VICI isn’t just any REIT. It’s a specialist in owning and managing gaming, hospitality, and entertainment properties. Its portfolio includes many of the most iconic casino resorts on the Las Vegas Strip, such as Caesars Palace and the Venetian. The company essentially acts as a landlord, leasing these vast properties under long-term agreements that provide steady, predictable rental income. This makes it a fascinating candidate for investors seeking robust passive income streams.
A closer look at the numbers
So why is VICI catching my eye? For starters, the dividend yield is a solid 5.2%, comfortably above the S&P 500 average. Its dividend payouts appear sustainable, too, with a payout ratio of 68.3%. That means it retains sufficient earnings to reinvest or manage debts while still rewarding shareholders handsomely. Even better, VICI has now increased its dividend for six years running, at an average annual rate of 5.3%.
It’s also not one of those income stocks that trades at a lofty premium. VICI’s price-to-earnings (P/E) ratio is just 13.34, and its price-to-book (P/B) ratio stands at 1.33. That’s a modest valuation for a company delivering both growth and stable dividends.
Looking at the balance sheet, VICI appears well-managed. It holds £45.53bn in assets, balanced against £17.43bn in debt, giving it a debt-to-equity ratio of just 0.67. For a property-heavy REIT, this level of gearing seems quite reasonable.
It’s also a highly profitable business, with a return on equity (ROE) of 10.12% and a remarkable net margin of 67.8%. That means a significant portion of its revenue drops through to the bottom line, helping underpin those generous payouts.
The risks worth keeping in mind
Of course, no stock comes without risk. For VICI, one concern is sector concentration. With so much exposure to gaming and hospitality – and particularly Las Vegas – the company could be vulnerable if consumer spending weakens or tourism slows. Rising interest rates also pose a challenge for all REITs, as higher borrowing costs can squeeze margins or reduce the attractiveness of future acquisitions.
Then there’s the property market itself. While VICI’s long-term leases provide stability, changes in property valuations could impact the company’s balance sheet and investor sentiment. In addition, regulatory risks tied to the gaming industry are always worth watching.
Is it worth buying?
I believe VICI is a compelling stock to consider for investors looking to diversify their income portfolios with US real estate exposure. Its high dividend yield, steady growth, sensible payout ratio, and attractive valuation make it stand out in a market where many S&P 500 shares trade at far steeper multiples.
For me, it might not quite be the absolute best income stock on the S&P 500, but it’s certainly one of the more interesting REITs I’ve come across lately. As part of a well-diversified portfolio, it could prove to be a rewarding long-term holding.
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Mark Hartley has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.
