6.5% dividend yield! Should investors consider this FTSE 100 income stock?

The FTSE 100 is filled with phenomenal dividend-paying stocks. And while the index as a whole currently only offers a yield of 3.2%, some of its constituents are being far more generous.

For example, Land Securities Group (LSE:LAND), or Landsec, currently has a payout of 6.5%. So should investors think about buying these shares while the yield’s still high?

A passive income goldmine?

Looking at Landsec’s historical shareholder payouts, the commercial landlord has been quite a reliable source of passive income in recent years. That’s despite numerous spanners being thrown into the works, like the rise of remote working as well as interest rates.

After all, as a real estate investment trust (REIT), Landsec operates with a fairly leveraged balance sheet. At the same time, the firm owns a large number of office buildings, which have suffered from falling rental rates and occupancy since the pandemic.

However, thanks to some prudent decision-making from management, the group’s portfolio has steadily been simplified, steadily repositioning itself within the office sector and redeveloping assets into urban mixed-use properties, while continuing with its retail strategy.

Beyond building more resilience and predictability to its rental cash flows, these disposals have also helped tackle some of the group’s outstanding debts. And with the balance sheet looking a bit healthier, the sentiment among institutional analysts seems to be improving.

So far, this is sounding like a promising passive income opportunity.

Growing optimism

Restructuring a property portfolio is no easy task. Real estate assets aren’t very liquid, and it takes time to find a buyer at the right price. As such, in some situations, the group may be forced to sell at a discount, potentially even destroying shareholder value in the process, in order to raise capital quickly.

This was and continues to be a primary concern among institutional analysts tracking the business. However, looking at the latest share price forecasts, opinions are shifting from bearish to cautious optimism.

Barclays, ING, and Jefferies continue to maintain a Hold rating, but each has nonetheless hiked their share price targets for this business. And looking across the entire spectrum of opinions from the 15 analysts tracking this business, the average consensus forecast believes the stock could reach 700p by this time next year – roughly 15% higher than current levels, with dividends receiving a bump as well.

In other words, provided there are no more surprise disruptions, this enterprise seems to be on track for a steady recovery, rewarding investors with a high yield in the process.

What to watch

Even with the ongoing adjustments to its property portfolio, the firm’s retail exposure means that it continues to be heavily dependent on the state of UK consumers. And right now, consumer spending isn’t exactly gangbusters.

Persistent inflation and elevated interest rates continue to hamper household spending. At the same time, e-commerce continues to rise as a retail channel, sitting at around 27% versus 19% in 2019 – a trend that may steadily put downward pressure on retail rental income.

Nevertheless, with most of the immediate threats to this business seemingly in the rearview mirror, and cash flows still covering its impressive dividend yield, I think this FTSE 100 stock deserves a closer look from investors comfortable with taking on a bit more risk.

The post 6.5% dividend yield! Should investors consider this FTSE 100 income stock? appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended Land Securities Group Plc. 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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