There are many ways to take one dollar and grow it into so much more. Some investors buy and sell daily, trying to grow it aggressively. Others like to buy large blue-chip stocks and let them accrue dividends. And others like to avoid the markets all together and become landlords. Personally, I would love to become a landlord, but the amount of money and responsibility it takes to grow a real estate empire is astronomical. To top it off, I’d then have to suffer through the learning curve that comes from being a real estate investor.
An easier and smarter way would be to buy shares in RioCan Real Estate Investment Trust (TSX:REI.UN), the largest REIT in Canada. For those that don’t know, a REIT is a special kind of company that is exempt from paying taxes in exchange for passing the majority of its profits to investors. Because of this, it’s easy to see REITs have really high yields.
Not only are REITs great for generating yields, but when the markets turn, the ability to continue generating dividends is a great way to keep your portfolio secure. Here are a few reasons that you should consider starting a position in RioCan.
Steady dividend
Let’s start with the end and work our way back to why the end is possible. RioCan pays a tremendously lucrative dividend 4.85% yield, which comes out to right around $1.41 a year. This is paid monthly to investors; it is equivalent to you receiving a rent check from your tenants every single month.
When it comes to dividends, though, it is important to look beyond the yield and see if it is a sustainable dividend. There are so many REITs that pay ridiculous yields of 8%, but they are essentially spending more money than they bring in to keep those rates consistent. RioCan has an 85% payout ratio, which is reasonable. If you like pay raises, though, you’re not likely going to get one. RioCan likes to play it safe, so boosting the payout ratio could risk its clean record of monthly payments since the 90s.
The only way you’re going to get a pay raise from RioCan is if its growth initiatives actually work. Should the company start seeing increased revenue, then the ratio will drop and RioCan will be able to hike the dividend.
Incredible assets
I’m a big fan of the assets RioCan has because they’re used by everyone every day. It owns shopping complexes all across the United States and Canada. In the U.S., it has 48 locations with 13 million square feet. And across Canada, it has 340 different locations that have over 79 million square feet.
That alone gives the company a lot of potential to generate revenue. But then there’s the fact that it is diversified. Its largest tenant accounts for 4% of gross rents. Even if that tenant were to go out of business tomorrow, RioCan would only lose 4% of its rent. If you ask me, that’s really stable.
It’s growing higher
Having the foundation of great assets is a great way to ensure the company will be around for a while. But it still needs growth, and RioCan has developed a strategy that will have it growing higher. And by higher, I literally mean into the sky.
The company is going to be building residential units on top of its existing retail and commercial properties. Because the buildings are already built, it becomes much easier to build up. And it’s also much cheaper because they don’t have to buy the land: It’s already theirs. There are a few of these condos already in development, and if it works we can expect to see this strategy rolled out across the entire company’s portfolio.
It also has a partnership with Hudson’s Bay Co, which will result in Bay providing properties and RioCan providing the capital and management. This is going to give the company further growth across many of Canada’s biggest cities.
These sorts of investments are making RioCan a diversified company, which is smart for you. As a landlord, you want multiple properties generating revenue and you want the properties to be as diversified as possible.
