I think there are many ASX dividend shares that are better income choices than Telstra Corporation Ltd (ASX: TLS).
In my opinion, one of those better ideas is Arena REIT No 1 (ASX: ARF). As the name might suggest, it's a real estate investment trust (REIT). It predominately invests in childcare centres but also has some assets in the healthcare property space.
The one factor that Telstra has over Arena REIT is the income yield. Telstra has a trailing grossed-up dividend yield of 10.7% whereas Arena REIT has a distribution yield of 5.5%. So it seems as though Telstra's yield is nearly twice as large.
However, this is where I believe Arena starts becoming the better pick. Some analysts believe the Telstra dividend may face another cut of around 25% to 16.5 cents per share in 2019 if the telco is to stick to its sustainable dividend payout policy. That would put the Telstra forward grossed-up dividend yield at 8% – much closer to Arena's.
A dividend is only as reliable as the business' earnings.
The REIT sector has held up its value quite well over the past few months, with most other shares dropping in value significantly.
In FY18 Arena REIT grew its operating earnings per security (EPS) by 6.5% to 13.1 cents and increased the distribution per security by 6.7% to 12.8 cents.
There were several factors to the strong performance, including an average like for like rent review increase of 2.6%. The majority of rent reviews are fixed or linked to CPI with a ratchet of at least 2.5%.
The REIT's weighted average lease expiry (WALE) increased to 12.9 years in FY18, which is one of the longest of the REIT sector. Less than 23% of the portfolio's income is subject to expiry prior to FY2029, only 2% is subject to expiry before FY2023.
Arena REIT has maintained its 100% occupancy, it means it's getting the most income it can out of its property portfolio.
Foolish takeaway
The FY19 projected full year distribution of 13.5 cents will be a 5.5% increase compared to FY18 thanks to contracted rent increases and the full impact of FY18 development completions.
I think Arena looks in good shape with the gearing dropping from 27.5% in FY17 to 24.7% in FY18. I'm happy that I own a small position considering how it has performed over the past year.
