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RRSP Investors: A Contrarian Pick Yielding 5%

Canadian investors are searching for high-yield stocks to put in their RRSP portfolios.

Let’s take a look at RioCan Real Estate Investment Trust (TSX:REI.UN) to see if it is attractive right now.

Rate concerns

The REIT sector has come under pressure over the past year, as investors worry that rising interest rates in the United States could hammer the group.

RioCan hasn’t been spared with the unit price falling from $30 in July to below $25.50 last month. Since then, the name has picked up some support.

Rising rates are a risk to REITs, which generally carry high levels of debt. RioCan knows this and has taken important steps to prepare for a higher-rate environment.

The company sold off its U.S. properties last year and used the proceeds to pay down the debt position. In fact, RioCan ended 2016 with a total-debt-to-total-assets ratio of about 40% compared to 46% the previous year.

If rates rise significantly over a short period of time, RioCan and its peers will come under more pressure, but the likely scenario is a gradual process of small hikes by the U.S. Fed over a number of years. In that situation, RioCan should be able to adjust.

In Canada, rates are not expected to rise in the near term, and some pundits even think the next move could be a cut.

The rebound in RioCan’s unit price that has occurred in the wake of the March Fed rate hike suggests the market might have gotten ahead of itself with the sell-off over the previous nine months.

Growth

RioCan has some interesting projects under way that could generate solid revenue growth in the coming years.

The company has interests in 15 retail developments with total space of 6.4 million square feet with 3.8 million net to RioCan. In addition, the REIT is planning to build up to 10,000 residential units at its top urban locations over the course of the next decade.

The project is in its early stages with 12 approvals already received and an additional six expected by the end of 2017. RioCan has identified nearly 50 properties in six key markets that could benefit from the program.

Distribution safety

RioCan’s occupancy rate increased last year, the company’s debt level dropped, and operating income rose 5.3% compared to 2015.

Investors shouldn’t expect to see a hike in the payout in the near term, but the distribution should be safe, and currently yields 5.3%.

Bottom line

RioCan looks appealing at the current unit price if you think interest rate fears are overblown, and there could be some nice upside once the residential development projects start to ramp up.

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Fool contributor Andrew Walker has no position in any stocks mentioned.

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