Dream Office REIT: Get Paid 8.2% to Own This Forever Asset

Dream Office REIT (TSX:D.UN) offers investors a great opportunity to really compound their dividends. Here’s how.

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Billionaire investor Warren Buffett is a fan of holding stocks for a long time. He’s famously said his favorite holding period is “forever.”

There are a few reasons for that. First, why sell a high-quality business when you’ve already established an ownership position in it? Unless you can find an even better place to invest that capital, it’s silly to sell just because Mr. Market is quoting you a slightly higher price than before.

Secondly, there are tax considerations. Unless you’re holding a stock in your TFSA or RRSP, you’re looking at paying capital gains taxes once you sell. Taxes shouldn’t be looked upon too negatively — after all, they fund things like universal health care — but there’s certainly value in delaying them for as long as possible.

Finally, there’s the compounding effect. If you can find a nice business with a competitive economic advantage that pays you dividends, there’s a ton of value in just reinvesting those dividends back into the company.

Take, for example, Dream Office REIT (TSX:D.UN), Canada’s largest pure-play owner of office property across the country. The company owns 177 different properties and more than 24 million square feet of leasable area, which is rented out to various levels of government and some of Canada’s largest corporations.

Dream currently pays investors an 8.2% dividend just for owning the shares. Normally, any dividend of more than 8% is considered suspect by the market, but this payout looks to be pretty secure. The company has a payout ratio of under 90%, and it reported good leasing gains in the fourth quarter that should improve its occupancy rate, which had been trending down of late.

Here’s the big advantage of the dividend. Assume you bought 1,000 shares of Dream today, paying $27,420 (plus commission) for the transaction. Each month, those shares would pay you $186, which the company will let you reinvest into more shares for free just by signing up for its dividend reinvestment program.

Assuming no change in the company’s price, you’d be looking at 81 additional shares in the first year just by reinvesting your dividends. Here’s how it would look after five years.

Year Number of Shares Dividends Received Number of New Shares
1 1,000 $2,232 81
2 1,081 $2,412 88
3 1,169 $2,609 95
4 1,264 $2,821 103
5 1,367 $3,051 111

In just a handful of years, the gains are already starting to look impressive. An investor would be sitting on almost 50% more shares and a potential yearly income of nearly $3,300.

And to top it all off, the results would be slightly better than what I listed, because the company gives you a 5% discount when you purchase shares through its DRIP program.

Of course, the company’s succulent dividend is just gravy. There are more reasons why you want to buy this stock.

For a REIT, it has a pretty solid balance sheet. It has been aggressively renegotiating its mortgages, leading to cost savings there. Plus, it isn’t aggressively financed, as the value of its debts is less than 45% than the value of the assets. The company’s book value is approximately $35 per share as well, meaning investors are buying this great group of assets at a price of about 70 cents on the dollar.

Even as companies try to downsize and encourage employees to work at home, office space will always be needed. Dream has a great portfolio of it, the majority of which is located in the center of Canada’s major cities, close to amenities like mass transit. This property will always have value, since it’s not very easy to build in a downtown core. Investors are being given an opportunity to load up on a great bunch of assets for a cheap price. That’s why I own this REIT, and why I think you should too.

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 owns shares of DREAM OFFICE REAL ESTATE INVESTMENT TRUST.

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