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Government Properties Income Trust Dividend Safety Analysis: Higher Yield Brings Higher Risk

March 28, 2014 | About:

Government Properties Income Trust (GOV) is a real estate investment trust which owns properties primarily leased to the government. GOV owns 68 properties, 49 of which are leased to the U.S. government, 16 to state governments and one to the United Nations.

There are a number of benefits of being a landlord to Uncle Sam. The U.S. government is the nation’s largest renter, it will likely never bounce a rent check, and it tends to lease for the long-term. Even though GOV enjoys such a reliable and sound renter of its properties the stock still yields nearly 7%.

Using our REIT dividend safety analysis, lets see how safe that juicy dividend really is.

Government Properties Income Trust dividend analysis

Note: AFFO calculation was based off of 2013 funds from operations (FFO) minus recurring capital expenditures

For 2013 GOV had an adjusted funds from operations (AFFO) dividend payout ratio above 100%. This means that the funds from operations minus recurring capital expenditures was not enough to cover the total dividends paid during 2013. Going forward GOV will need to reduce its capex costs or increase its FFO in order to bring the AFFO payout ratio to a safer level. The high payout ratio is likely why management has kept the quarterly dividend payment at 43 cents for the past six quarters. If there is a dividend raise announced in the near future it will likely be just 1 cent based on the current AFFO payout ratio.

GOV has achieved a strong occupancy rate and has increased that rate versus 2012. The company also did well to manage through the recent government spending cuts. Those investors willing to take on a little more risk in order to cash in on a high yield may wish to look further into GOV, but those looking for a safer pick may want to wait until the AFFO payout ratio comes down to a more comfortable level.

Disclaimer: The 4% Portfolio Retirement Service has made no recommendations on GOV.

About the author:

The 4% Portfolio is designed to provide a smarter way for retirees to follow the 4% rule without having to sell a portion of their stock portfolio each year. Our portfolio is based around financially sound corporations spread across multiple industries who reward investors through regular dividend payments. When invested evenly among the stocks in our Portfolio, an investor will yield at least 4% in dividend income each year.

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GuruFocus has detected 5 Warning Signs with Government Properties Income Trust $GOV.
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