Dividends tend to continue to be paid, even when stock prices go down. This is in general terms as select dividend stocks in the energy and mining sectors cut their dividends last year.
So, investors looking for secure dividends should choose dividend stocks carefully. Specifically, they should choose businesses that are in stable industries and generate stable cash flows.
Real estate investment trusts (REITs) generate stable cash flow. REITs own interests in dozens to hundreds of properties that they receive rent from every month. In turn, they pay out monthly distributions to shareholders.
Artis Real Estate Investment Trust (TSX: AX.UN) owns interests in 251 properties in office, industrial, and retail real estate. Artis generates approximately 28% of net operating income from the United States.
At $11.10, Artis pays out a safe 9.8% yield based on a committed portfolio occupancy of over 93% and an adjusted funds-from-operations (AFFO) payout ratio of under 83% that is anticipated for this fiscal year. Investors should also note that the REIT has paid and maintained its distribution since 2007. In fact, Artis increased its distribution by 10.3% in 2008.
Dream Industrial Real Estate Invest Trst (TSX: DIR.UN) owns 220 industrial real estate properties in major markets of Canada. The REIT’s price has fallen almost 18% from a year ago, likely because of its 24% gross leasable area exposure to Alberta.
In reality, only 3.3% of Dream Industrial’s GLA are oil- and gas-related tenants. Additionally, the REIT reported in December that its Albertan portfolio maintained a high occupancy rate of 97%. Further, less than 1% of total GLA expires in the next two years.
At $7.40, Dream Industrial pays a safe 9.4% yield based on a portfolio occupancy of 94.6% and an AFFO payout ratio of under 84% that is anticipated for this fiscal year. Investors should also note that the REIT has paid and maintained its distribution since its initial public offering (IPO) in 2012. In fact, it increased its distribution by 4% since IPO.
Tax on the income
REITs pay out distributions that are like dividends but are taxed differently from dividends. If you wish to avoid the different tax-reporting hassle, buy REITs in TFSAs to earn tax-free monthly income and in RRSPs to earn tax-deferred income.
Investors may also be interested to know that in non-registered accounts, the return of capital portion of REIT distributions is tax deferred until unitholders sell or adjusted cost basis turns negative.
In conclusion
No matter what the market does, I believe both Artis and Dream Industrial have the ability to maintain their current distribution yields of over 9% because of their high occupancy and conservative payout ratios. Particularly, income and value investors should consider their discounted shares. From their book values, Artis is discounted by about 37%, while Dream Industrial is discounted by about 33%.
