Gladstone: GOOD Pick for Income

05/19/2014 7:00 am EST

Focus: REITS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Every income portfolio needs a dependable, sleepy, high-yield investment that's able to deliver cash in monthly increments, suggests Ian Wyatt, editor of High Yield Wealth.

Our latest recommendation is Gladstone Commercial Corp. (GOOD), which is a small-cap commercial property real estate investment trust. Gladstone shares don't move much from month to month, but that's fine with us.

We're not recommending Gladstone for price appreciation, we're recommending it for its $0.125 in monthly dividends per share, which currently provide an 8.6% yield. The company has been delivering income at this rate every month without fail for the past six years.

Gladstone's income is dependable because it is derived from a portfolio of over 80 properties that are diversified across use and geography. This helps insulate the company from a downturn in any particular industry or any particular location.

It's no surprise, then, that Gladstone has never lowered its dividend payout. On the contrary, it has increased the payout three times in the past ten years.

Gladstone's small size—$320-million market cap—means it flies under the radar of most institutional investors. But it shouldn't fly under the radar of income investors seeking a high-yield alternative to low-yield fixed-income investments. Buy Gladstone Commercial Corp. shares up to $18.50.

With REITs like Gladstone Capital, taxes on dividends aren't always straightforward. REIT dividends not only differ from C-corp dividends, they differ from REIT to REIT.

Dividends from REITs are composed of earnings, return of capital, and capital gains. All three of these components are taxed at different rates, with return of capital not being taxed at all. Return of capital, instead, reduces the cost basis of the REIT investment.

In 2013, Gladstone paid $1.50 in dividends per share. Of that dividend, 81.7% was non-taxable return of capital, which means only 18.3% of the dividend was subject to immediate income tax.

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