Monthly Dividend Stock In Focus: SL Green Realty Corp - Sure Dividend

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Monthly Dividend Stock In Focus: SL Green Realty Corp

Published on April 27th, 2022 by Quinn Mohammed

Many investors find high-yielding stocks appealing for the income that they produce. This is why Real Estate Investment Trusts, or REITs, are so popular among dividend growth investors. REITs are required to pass along the majority of income in the form of dividends.

SL Green Realty Corp (SLG) is a good example of a high yielding REIT, as the stock pays a 5.0% yield at the moment. SL Green also pays a monthly dividend. There are currently fewer than 50 monthly dividend stocks.

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Sometimes, a high yield can be a warning sign to investors that there is a problem with the underlying company. SL Green, however, appears to be an attractive investment opportunity. In addition to the high yield, SL Green also has solid growth prospects, making it an appealing investment option for both income and growth investors.

This article will analyze the investment prospects of SL Green in further detail.

Business Overview

SL Green is a self-managed REIT that manages, acquires, develops, and leases office properties in the New York City Metropolitan area. In fact, the trust is the largest owner of office retail estate in New York City, with the majority of properties in midtown Manhattan. The trust has a market capitalization of $4.8 billion and is Manhattan’s largest office landlord, with 72 buildings totaling 35 million square feet.

The location of properties benefits the trust as more technology and financial companies desire centrally located real estate in the area. While many think of San Francisco as the technology hub in the U.S., New York City is also one of the largest employers in the sector. This should allow SL Green an opportunity to capitalize on this growing field with its strategically located properties.

As of April 20th, 2022, SL Green owned a total of 72 properties with a total footprint of 34.7 million square feet. The combined revenues of the trust’s tenants are more than $1 billion. SL Green has an investment grade rating of BBB from Fitch as well. SL Green has compounded funds-from-operation at a rate of 2.9% over the last nine years.

Shares of SL Green generated total returns of 26.4% in 2021, after suffering losses of 30.0% in 2020 due to the effects of the pandemic. The stock is down just over 5% from the start of this year. Office and retail space REITs have been hit especially hard in this environment as employees are working more from home more than the office.

While the short-term outlook has continued headwinds, SL Green has room to grow as well.

Growth Prospects

SL Green’s business has actually held up well, considering the very challenging operating environment over the past year. In late April, SLG reported financial results for the first quarter of fiscal 2022. Its same-store net operating income increased 9.3% over the prior year’s quarter but its occupancy rate decreased from 93.0% at the end of the previous quarter to 92.7%.

Its funds from operations (FFO) per share decreased -5% over the prior year’s quarter, from $1.73 to $1.65, due in part to asset divestments.

SLG has been significantly affected by the coronavirus crisis, which has hurt several companies that are tenants of SLG. Occupancy of office space in in New York is near historic lows.

While retail will likely be an ongoing issue until the COVID-19 pandemic subsides, SL Green has seen strength in its other property types. This diversification should help offset weakness in retail going forward.

SLG is still under pressure due to the pandemic, which has caused a work-from-home trend. However, it has one of the strongest balance sheets for a REIT, as its net debt of $5.2 billion is 10 times its annual funds from operations. This helps explain the strong BBB credit rating of SLG. Thanks to its financial strength, the REIT can endure the ongoing crisis and emerge stronger as the pandemic subsides.

Dividend and Valuation Analysis

Until recently, SL Green paid a dividend on the more customary quarterly schedule. That changed in 2020 when the trust began paying a monthly dividend in April 2021. At a current monthly rate of $0.3108 per share, SL Green has an annualized dividend payout of $3.73 per share, representing a 5.0% current yield.

Even better, the dividend looks safe even with the COVID-19 headwinds. We expect SL Green to produce $6.60 of funds-from-operation in 2022, giving the stock a projected dividend payout ratio of 57%. This is a low payout ratio for a REIT. The trust has seemed to manage its business well, which is one reason the dividend has been raised for 11 consecutive years.

In December 2021, SLG raised its dividend by 2.5%, and also announced a special dividend of $2.4392 per share, due to its asset dispositions in 2021.

The stock also appears to be undervalued from a valuation perspective. Using the current share price of ~$75 and expected funds-from-operation for the year, SL Green trades with a forward price-earnings ratio of 11.4. Shares have traded with an average price-to-funds-from-operation of 14.0 over the last decade.

Even giving the stock a lower fair value estimate of 13 times FFO due to COVID-19 headwinds, the stock is undervalued which could result in strong returns due to multiple expansion. The combination of an expanding P/FFO multiple, 5% expected FFO-per-share growth and the 5.0% dividend yield result in total expected returns of 11.7% per year over the next five years.

Final Thoughts

SL Green is a high-yielding REIT that is facing headwinds to its business. The COVID-19 pandemic has negatively impacted rent collections for its retail properties. Even so, the REIT has maintained solid occupancy and rent collection in recent quarters.

SL Green also has long-term growth prospects given that it is concentrated in a high demand area of New York City. This should allow for the occupancy rate to remain high. The trust also has a well-covered dividend and trades at a discounted valuation. For these reasons, SL Green stock is a buy for value and income investors.

Related: The Top 4 Stocks To Start Your Retirement Portfolio

If you are interested in finding more high-quality dividend growth stocks suitable for long-term investment, the following Sure Dividend databases will be useful:

The major domestic stock market indices are another solid resource for finding investment ideas. Sure Dividend compiles the following stock market databases and updates them monthly:

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