3 Depressed Income Stocks as Trading Ideas

Two of the three stocks discussed in this article can be strong turnaround ideas with short-term double-digit returns if management executes well. Right now, all three are trading at near their 52-week lows. So, investors who are looking for some excitement and income should look into them.

Entertainment Stock with a Big Monthly Dividend

At under $26 per share, Cineplex (TSX:CGX) yields about 6.7%. With a recent payout ratio of roughly 64% based on adjusted free cash flow, the yield should be safe.

Cineplex generates about 74% of its total revenues from moviegoers via their spending on movie tickets and food & drinks. The entertainment company has been investing in areas outside of the theatres, including in The Rec Room, Topgolf, Playdium, and virtual reality installations in some of its locations.

Currently, Cineplex trades at more than a 20% discount from its normal cash flow multiple. If management executes well and the investments turn out to be successful, the discounted stock can experience growth that will boost the stock price to the $35-39 level over the next one to two years for 35-51% upside, while paying a yield of nearly 7%.

Increasing Interest Rates has Depressed Many REITs

There’s increased danger of dividend cuts from real estate investment trusts (REITs) because of their inherent natures of having large debt levels from their mortgages. Additionally, they tend to pay out most of their cash flows as dividends, which makes it more dangerous if there’s any decreased demand for their properties.

That’s why you’ve seen top-tier REITs, which have properties in the best locations, including Canadian Apartment Properties REIT (TSX:CAR.UN) and Allied Properties Real Estate Investment (TSX:AP.UN), doing much better than their peers.

In the last five years, the stock of Canadian Apartment Properties REIT more than doubled from the $20 to $46 per unit, while Allied Properties has appreciated 38% and has been a much more stable stock than its peers.

American Hotel Income Properties REIT LP (TSX:HOT.UN) stock has fallen about 27% in the last year. If you think its previous +9% yield was enticing, you’ll find its 13% yield mesmerizing, which is due to the fallen stock price.

Because of reduced cash flow, American Hotel’s adjusted funds from operations (FFO) payout ratio is estimated to push to as high as 100% this year, which makes it a prime candidate for a potential dividend cut. However, at a normalized level, the stock can trade at about $8.50 per unit, which is +28% upside potential from $6.61 per unit as of writing.

Investors buying American Hotel must believe that its fundamentals will improve as early as 2019 as the REIT’s renovation completion at some of its hotels allows for normal operation again. Assuming a payout ratio of 80-90%, we’re looking at a dividend cut to a yield of about 10-11% based on the current stock price.

Slate Office REIT (TSX:SOT.UN) stock has fallen about 13% in the last year. At $7.09 per unit as of writing, the stock offers a nearly 10.6% yield. The REIT has 43 office properties.

Its FFO payout ratios were between 93-111% and its adjusted FFO payout ratio were 109-134% in the past five quarters. So, I can’t say its dividend is 100% safe. That said, its FFO payout ratio of 93.5% was the best that it has been in the most recent quarter.

Investor Takeaway

It’s a tricky business to buy stocks that are in a downward momentum. If you’re interested in any of these ideas, look for strong upward action or consolidation in the stocks before consider buying. Of the three stocks, I’d consider Cineplex and American Hotel as potential turnaround plays.

Here are some safer income stocks for your consideration.

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Disclosure: At the time of writing, I didn’t own any of the mentioned stocks.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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