Sunstone Hotel Investors Inc. (NYSE:SHO) is a lodging sector REIT that follows a different dividend strategy compared to its peers. SHO pays a $0.05 quarterly dividend, which is a 1.6% yield on the current share price. The company also declares a year end large dividend to bring the total dividends for the year in line with the REIT 90% of income payout rule.
Last year, SHO paid $0.36 per share as the year-end special dividend. This year, management has indicated a $0.48 to $0.52 per share payment to be declared in December sometime and paid in January. The SHO share price is down 21% from where it was one year ago.
The lodging REITs as a group are down significantly this year, and the Wall Street analysts are reducing their recommendations in the sector. Sunstone Hotel Investors has been singled out as one lodging REIT to own compared to its peers.
With the big dividend payment coming in late January, there is potential for a sharp share price increase as the investing community learns of the payment and either tries to dividend capture or assume that that is a new quarterly rate. In either case, I think we can pick up a 5% to 10% gain between now and the end of January. I will take the middle ground and set an initial 7.5% target gain.
Recommendation: Buy SHO today or below $13.40 in the coming days.
Target price: $14.40 before the end of January 2016.