Why Dream Office REIT Is a Dream Addition to Your Portfolio

With a low price to net asset value and a succulent dividend, shares in Dream Office REIT (TSX:D.UN) are looking attractive at these levels.

| More on:
The Motley Fool

Call me a crazy contrarian, but I’m not convinced that interest rates are headed up anytime soon.

Perhaps a short history lesson can help prove my point. In 1943, investors buying a five-year U.S. Treasury bond were getting a paltry 1.2% yield. World War II was devastating markets around the world, leaving fixed-income investors little choice but to buy local. Besides, the patriotically themed push to buy victory bonds was one of the reasons our side ended up victorious.

Because of the war, the U.S. increased its debt-to-GDP ratio significantly, topping 90%. Soldiers were coming back home, and additional money was needed to spend on social programs easing their transition. Naturally, folks predicted interest rates would jump up. At some point, bondholders started to lose faith in the U.S. government, demanding at least a little more in exchange for holding bonds.

Bonds did eventually rise. The yield on the five-year Treasury note bumped up to 2.2%. The only problem? That didn’t happen until 1955.

I see a lot of similarities between the 1940s and 50s compared to now. Governments around the world have borrowed significantly, and investors seem happy to settle for a low yield. We’ve heard for years now that yields are bound to head up, but they never do. What if we’re in a prolonged low interest rate environment like back then?

It’s simple. Interest-rate-sensitive stocks will continue to perform well. This includes my favorite pick of the REIT sector, Dream Office REIT (TSX: D.UN).

The company is one of Canada’s largest commercial REITs, owning office space across the country with a focus on Toronto and Calgary. It currently owns 186 properties in mostly prime downtown locations, including more than 24 million square feet in leaseable area. Its top tenants are some of the largest companies in the country, as well as various levels of government. These folks aren’t about to skip town without paying the rent.

The company sold off last year when the market feared interest rates were starting to rise, but didn’t join the rest of the sector in rallying when rates softened during the early part of 2014. Part of the problem was because it issued some lackluster results, including an occupancy rate that was below investor expectations but still above its peers.

These minor issues have allowed the stock to become cheap. The company has a $3 billion market cap, yet has a net asset value of more than $3.7 billion. Finding small discounts to NAV is common in the REIT sector, but not a 20% gap.

Besides cheap assets, the company has another thing going for it. Its dividend yield is currently 7.7%, one of the highest in the industry and the stock market in general. However, unlike a lot of other high-yielding securities, Dream’s yield looks pretty solid. The payout ratio is only 90%, and improved in 2013 compared to 2012.

Plus, if interest rates continue to stay low, Dream Office will stand to benefit. Like every REIT, it holds quite a bit of debt, currently at about 40% of assets. Low rates would assist the company in not only servicing this debt, but also securing its dividend.

If you believe that low rates are here to stay for at least a few more years, I think Dream Office REIT is a great choice. It has a terrific yield that looks secure, investors are getting a dollar’s worth of assets for $0.80, and if results improve, there’s even potential for capital gains. For a REIT, that’s about all you can ask for.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

More on Investing

A data center engineer works on a laptop at a server farm.
Tech Stocks

3 No-Brainer Data Centre Stocks to Buy With $500 Right Now

Data centres are going to be a huge growth opportunity in the next decade. And these are the top buys.

Read more »

Paper Canadian currency of various denominations
Bank Stocks

1 Magnificent Canadian Dividend Stock Down 28% to Buy and Hold for Decades

This top Canadian dividend stock is underperforming its large peers this year, but a turnaround could be on the horizon.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Investors: 3 Dividend Stocks Worth Holding Forever

These TSX stocks have the potential to grow their dividends over the next decade, making them top investments for TFSA…

Read more »

hand stacks coins
Investing

Secure a Wealthy Future With These 3 Canadian Stocks

These Canadian stocks have the potential to appreciate substantially over time and may also enhance returns through dividend payments.

Read more »

Tractor spraying a field of wheat
Dividend Stocks

Is Nutrien Stock a Buy for its Dividend Yield?

Nutrien is down more than 50% form the 2022 highs. Is NTR stock now oversold?

Read more »

analyze data
Investing

3 Blue-Chip Stocks Every Canadian Should Own

These blue-chip stocks are backed by large-cap companies with well-established businesses, solid fundamentals, and a growing earnings base.

Read more »

dividends grow over time
Stocks for Beginners

The Smartest Growth Stock to Buy With $2,000 Right Now

Do you have $2,000 to invest for the long term? These three TSX stocks have and will continue to deliver…

Read more »