Stable and rising dividends are a source of joy for many investors. Are falling dividends even better?

I’ve decided to find out, with real money, by taking a slim position in Allied Properties Real Estate Investment Trust.

The REIT, which owns office space in Montreal, Toronto, Vancouver, Calgary and Kitchener, has been distributing 15 cents per unit per month – or $1.80 per unit on an annualized basis – since the start of 2023, when it raised the monthly payout.

But the business of leasing office space has been lousy for a number of years, given that many people still work from home. The unstable Canadian economy isn’t helping.

Though Allied Properties had hoped to improve its occupancy rate to 90 per cent by the end of this year, the rate ended the third quarter well shy of that mark, at 84 per cent.

The REIT is struggling with a high debt load and it is distributing to investors almost as much money as it is generating, so executives are now considering cutting the monthly distribution to save cash.

“We haven’t made a formal recommendation, but it is one of the scenarios that is under consideration,” said Cecilia Williams, the chief executive officer of Allied Properties, during a conference call with analysts on Oct. 30.

That was disappointing news for current investors. The unit price fell 17 per cent in one day.

As the unit price fell, the distribution yield soared to a high of nearly 13 per cent. That could imply that the collective wisdom of the market is now expecting a severe cut.

Have I just thrown my money away?

Here’s my thinking: I’m guessing that the unit price of Allied Properties is already reflecting a distribution cut of about 50 per cent. That would take the yield down to a more reasonable 6.5 per cent.

I can live with that.

More importantly, if a distribution cut puts Allied Properties on a path toward a sounder financial footing with a healthier balance sheet and less debt, then the REIT could thrive.

More broadly, I’m counting on a pattern that I’ve seen in several cases where a company has slashed its distribution. The cut can bring a sense of certainty, attracting new investors and putting the stock on the road to recovery.

Sometimes – I must stress, sometimes – fears of a distribution cut are worse than the cut itself.

Sometimes.

I wrote about this topic way back during the 2007-08 financial crisis, when U.S. banks were blowing up. Toward the end of the crisis, some stocks would rally after they cut their dividend.

Case in point: JPMorgan Chase & Co., one of the healthiest banks during the crisis, cut its payout to 5 U.S. cents a share in February, 2009, from 38 U.S. cents previously. Far from signalling the end of the world, the share price nearly doubled by the end of the year.

During the initial COVID-19 lockdowns, in 2020, I tracked a number of Canadian stocks that cut their dividends to preserve cash, including Suncor Energy Inc. and CAE Inc. Within a year, many of these stocks outperformed those that didn’t cut their payouts.

Here’s a more recent example.

The share price of BCE Inc. (full disclosure: I own this stock, too) rallied more than 5 per cent the day that it cut its quarterly dividend by more than half, last May. It is up slightly more since then.

It may be too soon to declare that BCE is in the clear.

Similarly, Allied Properties hasn’t declared its distribution intentions, so my decision to buy the units might look like a speculative bet right now.

But that’s the point: If the low unit price is reflecting a lack of clarity, then more clarity should help. I hope.

Are you similarly enticed by distressed dividends? Send your thoughts to dberman@globeandmail.com.