Income investors are starting to look for new TFSA picks, and the market is finally offering a wide selection of discounted names that offer decent yields.
Some stocks have sold off to the point where yields are now above 10%. If you have the stomach for higher risk, they might be worth considering, but there is also a nice selection of companies with attractive yields in the 6-8% range with payouts that should be sustainable.
Here are the reasons why I think RioCan Real Estate Investment Trust (TSX:REI.UN) and Inter Pipeline Ltd. (TSX:IPL) are worth a look.
RioCan operates more than 350 shopping centres in Canada and the United States. Concerns about the weak Canadian economy, online shopping, and rising interest rates in the U.S. have taken a toll on the stock, but the selloff looks a bit overdone.
Most of RioCan’s anchor tenants in Canada are top-tier companies that sell recession-resistant products such as groceries, medicine, and discount household goods. These stores are more than capable of riding out difficult economic times, and some might even benefit as consumers switch to low-cost products.
Online shopping is certainly a threat for certain segments of the retail industry, but most Canadians still drive to buy their food, pick up prescriptions, or search for a new snow shovel. For the time being, the brick and mortar business is still going strong for RioCan’s big customers.
Rising interest rates are certainly a concern for the REIT sector because the companies tend to carry a lot of debt. Rate increases are a long way off in Canada and are likely to be small and drawn out in the U.S., so RioCan should be able to adjust.
The company also just signed a deal to sell its 49 U.S. properties. The sale will generate net proceeds of $1.2 billion that will be used to reduce debt and strengthen the balance sheet for new investments.
RioCan pays a monthly distribution of 11.75 cents per share that yields 6.1%.
Inter Pipeline transports about 35% of Canadian oil sands production and 15% of western Canada’s conventional oil output. The company also has a storage business in Europe.
The downturn in the energy sector has hurt the stock price, but the distribution looks safe and the long-term outlook for the business is attractive.
Inter Pipeline brought in Q3 2015 funds from operations of $205 million and only spent about $56 million on capital projects. That means the company generated $149 million in free cash flow, which was more than adequate to cover the $123.5 million in dividend payments.
In fact, the payout ratio for Q3 was just 64%, so the distribution shouldn’t be at risk.
Inter Pipeline’s storage business is doing well and the oil sands customers are not likely to disappear. At some point oil prices will recover, and Inter Pipeline’s stock should get a nice boost when that happens.
Inter Pipeline pays a monthly distribution of 13 cents per share that yields about 7.5%.