Should Income-Hungry Investors Buy RioCan Real Estate Investment Trust?

Because of its high-quality assets, its lucrative growth opportunities, and its generous dividend, income investors should buy RioCan Real Estate Investment Trust (TSX:REI.UN).

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When it comes to generating income from investments, some of the best assets to buy are real estate investment trusts (REITs) because they have special tax rules in place. In exchange for not paying income tax on its earnings, REITs have to pass on the bulk of its earnings onto investors in the form of dividends. Therefore, REITs are often times favourites because they pay very lucrative dividends.

RioCan Real Estate Investment Trust (TSX:REI.UN) is one example of a REIT that pays a lucrative dividend to investors. In many respects, it is probably one of the top REITs in Canada. There are multiple reasons why this is the case.

The first has to do with its network of shopping centres. Despite concerns that online retailers will put brick and mortar stores out of business, the recent news that Amazon is launching a physical bookstore shows that there is nothing faster than buying something in person. Therefore, I believe that its network of shopping centres is the primary reason why RioCan is so strong.

It has 80 million square feet of leasable space across 340 different locations in Canada. In the United States, it has 13 million square feet of space across 48 different locations. This alone is not reason enough to buy the stock. However, when you look at its tenants, it is easy to see why investors love the stock. Canadian Tire, Wal-Mart, and Cineplex are some of its tenants, and they always pay on time. And because these retailers are the types of tenants RioCan has, it has a 97% occupancy rate.

RioCan also is launching different initiatives that will help it continue to grow in the coming years. The first is a partnership with Hudson’s Bay Co. RioCan will provide the capital and management experience and HBC will provide the properties. This partnership will form a new entity that will be a new, publicly traded REIT, and RioCan will hold a significant percentage of the asset.

The other project is to build residential units on top of its shopping centres. This is a smart move because RioCan already owns the land and the foundation is already set, so building up is cheap. RioCan is experimenting with this project now, but if it is successful I expect to see RioCan ramp up these operations.

Finally, there is potential for a big reward to investors over the coming months and year. The company is exploring the sale of its U.S. operations. It bought those assets during the economic crisis. Years later, those assets are worth considerably more. Couple that with the strength of the U.S. dollar, and it’s a perfect opportunity to sell. And when that happens, RioCan will have to pass the bulk of the earnings on to investors.

Because of the company’s tremendous success, it is able to pay a 5.64% yield, which comes out to $0.12 per month. In essence, every time the tenants pay rent, you receive a dividend. If that doesn’t sound like an incredible income generator, I don’t know what does.

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 Jacob Donnelly has no position in any stocks mentioned. David Gardner owns shares of Amazon.com. The Motley Fool owns shares of Amazon.com.

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