Boost Your Income With REITs

Want monthly income of 7-9%? Consider industrial REITs such as Pure Industrial Real Estate Trust (TSX:AAR.UN) and one other REIT.

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It’s easy to find dividend stocks with 3-5% yields. Popular dividend stocks that have those yields include the biggest Canadian banks, telecoms, and utilities, and even some real estate investment trusts (REITs).

Take Canadian Apartment Properties REIT (TSX:CAR.UN) for example. It is a high-quality residential REIT that yields 4.2%. However, it’s priced at a price-to-funds-from-operations ratio (P/FFO) of over 17 times, while it’s expected to grow FFO per unit by 4-5%. So, in my opinion, it’s too pricey to buy this REIT at this time.

Typically, residential REITs and retail REITs have higher occupancies than other types of REITs, so they are good places to look for consistent income.

Why invest in REITs for income?

REITs own, operate, and manage many properties, so investing in a REIT spreads the risk across many properties instead of putting all of your eggs in one (or a few) rental property. REITs generate consistent cash flows from their property portfolios by collecting rent every month. In turn, they pay out most of that cash flow to unitholders as monthly distributions.

Industrial REITs: high occupancy and sustainable payouts

Industrial REITs also seem to have high occupancies despite the weak Canadian economy. In the nine months that ended on September 30, 2015, Pure Industrial Real Estate Trust (TSX:AAR.UN) had committed occupancy of 95% and an adjusted-funds-from-operations (AFFO) payout ratio of 91.2%.

Similarly, Dream Industrial Real Estate Invest Trst (TSX:DIR.UN) last reported a portfolio occupancy of 94.6% in its December presentation. This year its AFFO payout ratio is expected to be under 84%.

Above-average income

If you’re building an income portfolio, you want immediate income whether you are going to save it, spend it, or reinvest it. Both Pure Industrial and Dream Industrial pay above-average yields.

At $4.54 per unit, Pure Industrial yields 6.9%. At $7.92, Dream Industrial yields 8.8%. From their high occupancy levels and sustainable AFFO payout ratios, these REITs have the ability to continue paying these high yields.

If you invest $10,000 in each of them, you’ll receive an annual income of $690 from Pure Industrial and $880 from Dream Industrial.

Conclusion

Income investors should look for REITs with high occupancies, low payout ratios, and above-average yields to boost the income they receive from their portfolios. Industrial REITs such as Pure Industrial and Dream Industrial may be good candidates for a diversified portfolio.

Fundamentally, these industrial REITs are in fair-valuation range. However, cautious investors might decide to wait for a pullback as an entry point because both REITs have just experienced price run-ups, particularly, Dream Industrial.

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 Kay Ng owns shares of DREAM INDUSTRIAL REIT.

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