Stock market

This passive income stock has gained 8% this month alone and still looks undervalued.

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The big yellow group (LSE:BYG) is one of my favorite passive income investments of all time. The reason I love it so much is because it’s quite unusual. It’s a real estate investment trust (REIT), but it rents storage rather than residential accommodation or office space.

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This month alone, the share price has risen nearly 8.5 percent. Yet I still consider it undervalued and set for long-term growth, and it has a history of regular dividend increases. The yield is currently 3.7%.

Investing in the UK

One of the drawbacks of investing in Big Yellow Group is that it lacks global diversification. All of its operating income comes from the UK.

That means if it’s in my portfolio, I’ll need to supplement my geographic diversification through other investments. This will help protect my assets from any economic challenges that may arise in certain regions.

A closer look at dividends

There is a really powerful metric in financial analysis called ‘cost-to-yield’. It tells me that the investment has earned dividends based on when I bought it. If I had bought the big yellow shares five years ago, my yield on cost today would be 5.2%.

Additionally, management has not cut the dividend since 2011. The 10-year dividend growth rate is 13.3% per annum. Even more impressive is that if I had bought the shares 10 years ago, my dividend yield at cost today would be 12.8%.

I consider the shares undervalued.

The big yellow shares have a price-to-earnings (P/E) ratio of just 12, which is about the same as the average over the past decade.

I consider the stock to be undervalued as the company is making healthy growth, including a steady increase in its dividend. So, I think its P/E ratio should be slightly higher as a result.

In my opinion, a P/E of around 14 seems reasonable to me for Big Yellow at this time. This means around 15% discount may be available here.

Exposure to property risks

Investing in Big Yellow Group means I am exposed to property market fluctuations, including changing consumer demand, which can affect storage rental prices. During periods of severe recession in the UK, it is unlikely that the company will reduce its profits from time to time.

Also, there is a lot of competition in the space from small businesses. There are also big firms like Safe storage, which works like a big yellow. However, SAFE also has overseas operations, giving it a significant head start in international markets that could be a long-term competitive advantage.

A great return investment?

Still I like it a lot. I don’t have many investments that pay high dividends because, at this stage in my career, I want to focus on growth. However, Big Yellow Group has been on my watchlist for some time, and when it comes time for me to look for residual income from my portfolio structure, I think this company is one of the first companies I look into. I will invest.

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