Income Investors: Get +8% Yields From These REITs

Looking for above-average income? Buy Artis Real Estate Investment Trust (TSX:AX.UN) and another REIT in your TFSA for tax-free income.

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Monthly income is useful for paying the bills or for other needs, and it doesn’t have to come entirely from your job. Real estate investment trusts (REITs) are a great way to earn a passive monthly income.

REITs own a portfolio of real estate properties, collect rent, and pay out monthly distributions. If you don’t need the income right now, you can reinvest it for more income.

Dream Global REIT (TSX:DRG.UN) allows you to gain access to a portfolio of 208 properties of office and mixed-use space in Germany and Austria. The REIT’s assets are located in seven main office markets in Germany, including the cities of Hamburg, Cologne, Frankfurt, and Munich.

From 2014 to 2015, Dream Global’s fundamentals strengthened. For example, its occupancy rate improved by 2.2% to 87.5%. Additionally, its average in-place net rent per square foot improved by 8.5% to EUR$9.61. Its average debt level was reduced by 3% to 52% net of cash.

At $8.60 per unit, Dream Global yields 9.3%. If you buy 500 units today for $4,300 (excluding transaction fees), you will generate almost $400 of passive income (or $33 and change per month). If you don’t need the income now, you can choose to reinvest the distribution for a 4% discount. Simply enroll in the REIT’s distribution-reinvestment plan.

Artis Real Estate Investment Trust (TSX:AX.UN) is a diversified REIT that invests and owns about 250 properties in central and western Canada and in certain U.S. markets. Artis earns about 50% of its net operating income (NOI) from its office assets and 25% of its NOI from its retail and industrial assets.

Because Artis earns about 35% of its NOI from Alberta, the REIT has pulled back and remains about 15% below its 52-week high of $15. Interested investors should note that the REIT also earns NOI from more stable regions: 28% from the U.S., 10% from Ontario, and 9% from British Columbia. At the end of 2015, Artis’s committed occupancy level was 94.7%.

Artis’s 2014 and 2015 acquisitions and the strong U.S. dollar helped the REIT to achieve adjusted funds from operations per-unit growth of 8.9% in 2015, which helped reduce its payout ratio to 83.1%. So, at $12.70 per unit, Artis’s 8.5% yield remains sustainable.

If you buy 500 units today for $6,350 (excluding transaction fees), you will generate almost $540 of passive income (or almost $45 per month). If you don’t need the income now, you can choose to reinvest the distribution for a 3% discount. Simply enroll in the REIT’s distribution-reinvestment plan.

Tax on REIT distributions

REITs pay out distributions that are like dividends but are taxed differently. If you wish to avoid the different tax-reporting hassle, buy REITs in TFSAs to earn tax-free monthly 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.

Conclusion

If you’re looking for above-average income, consider the discounted Artis REIT for its 8.5% yield or Dream Global REIT for its 9.3% yield and Germany real estate market exposure.

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 GLOBAL REIT.

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