Income investors beware of fools gold

Its been a rocky old week for income investors and particularly for anyone that has invested in income generating property stocks.

The markets continued to fall during the early part of the week but towards the end the bargain hunters were in evidence.

Fools Gold
What income investors have got to guard against when looking for income generating property stocks are headline grabbing yields. For instance a stock such as Invesco Property Income Trust. This fund launced in September 2004 on its current share price of 44.75p gives it a valuation of £68.5 million and a prospective yield assuming its implied annual dividend of 6.8p of an incredible 15%. The shares are also trading at a discount to its most recent asset valuation to the end of September of 114p of 60%. Too good to be true. Well yes.

If an income monkey cares to look a little closer at the last published accounts for the half year to the end of September 2007 they should immediately go to the consolidated income statement. This revealed that income from rental & service charges was £14,761,000. Expenses were £6,382,000 before finance costs i.e. interest payments. When tax and finance costs are added to expenses net income actually comes out at £1,448,000. Clearly the company is viable and can service its expenses. However, with 153 million shares in issue the dividend of 6.8p costs just under £4.6m for the half year; considerably more than the free cashflow of just under £1.5m. This is clearly unsustainable without the company making substantial gains on the asset value of it's underlying portfolio and then refinancing or selling and using the funds to bolster the dividend fund.

With prices in commercial property set to fall by as much as 15% next year a forced sale would not be a good option and with the credit crunch impacting on credit availability then refinancing is not likely to be a viable option, particularly when the company recently came clean that they were close to breaching their lending covenants.

INCOME MONKEY VERDICT
It look inevitable that the company will have to cut its dividend in 2008. Therefore this stock is not one for the income seeking investor. However, it might represent an opportunity for investors who feel that at 60% discount to underlying assets that this company is oversold and once it's short term difficulties are overcome this viable company's real value will start to be reflected in a recovering share price.

COMING SOON 3 INCOME GENERATING PROPERTY STOCKS TO BUY


For investors looking at advice on how to invest directly in buy-to-let property have a look at property hawk. The UKs number 1 site for UK buy-to-let.