Income investors are always looking to get the highest yield possible without taking on too much risk.
Sometimes it isn’t easy to tell if a big dividend will stay that way, and many former dividend champs have recently become chumps.
At the moment, the market is full of juicy yields, but which ones are safe?
Let’s take a look at RioCan Real Estate Investment Trust (TSX:REI.UN) to see if its distribution is at risk of being cut.
Business operations
RioCan owns retail properties in the United States and Canada. The buildings are located in prime locations and the company’s anchor tenants tend to be big stable names capable of riding out cyclical downturns in the economy.
Some of these companies even thrive when consumers start to tighten their belts because they offer products catering to the penny-pinching crowd. Others target high-end clients who tend to be immune to economic weakness.
This means RioCan has a built-in hedge for tough economic times.
Risk outlook
Investor have knocked RioCan’s stock down about 12% over the past six months. Concern about the economy is one part of the story; the other is related to interest rates.
For most of this year the market has been anticipating a hike in U.S. rates. The move would make borrowing money more expensive, and REITs tend to carry a lot of debt.
Last week the U.S. came out with weaker-than-expected employment numbers, and that threw a bucket of cold water on the pundits who have been forecasting an imminent rate hike.
Some pressure has come off the REITs, and we could see a near-term rally. Down the road, investors shouldn’t be overly concerned when rates start to move higher because the hikes will likely be small and spread out. As a result, the REIT sector should be able to adjust without much trouble.
Here in Canada, rates have decreased twice this year, and there is little indication that the trend will change anytime soon.
RioCan only has 47 properties in the U.S., and management is considering a sale of those assets to lock in gains. The Canadian portfolio holds nearly 300 properties.
A look at the numbers
RioCan’s numbers are pretty solid. The company delivered a 7% increase in funds from operations for the second quarter as compared with the same period last year. Tenants signed up for 1.1 million square feet of retail space at an average rent increase of just under 10%, so the company’s customers are obviously comfortable with their revenue outlook.
One interesting development is RioCan’s plan to build residential units at some of its retail locations. The project is in its early stages, but the move could generate solid cash flow growth in the next few years.
Distribution safety
RioCan pays out an annualized distribution of $1.41 per share, which offers a yield of about 5.5%. The distribution looks safe, and investors could see a special payout if the company sells the U.S. assets and decides to return some of the profits to unitholders.
