Smart REIT: the Perfect Forever Stock for a TFSA or RRSP

Many investors want to stuff their portfolios full of “one-decision” stocks. These are the kinds of companies you have to decide to buy with the objective to hold on to them forever.

There are plenty of reasons why one would want this strategy. Owning terrific companies can lead to outsized returns. It frees up time to worry about other matters. And studies have that shown investors who do a lot of buying and selling tend to end up with less money than buy-and-hold folks.

The other nice thing about finding these forever stocks is that investors generally don’t have far to look. Some of the companies we use every day have been terrific investments in the past and should continue to be in the future.

Here’s the case for Smart REIT (TSX:SRU.UN)–a company many argue is Canada’s finest REIT and one of our best companies in general.

A better way to invest in retail

Retail is a tough business.

Even the best retailer in the world, Wal-Mart, can still only get net margins of between 4% and 5% before taxes. Compare that to other industries and the conclusion is quickly obvious. Price pressures and competition have made selling things to people a crummy business.

As far as I’m concerned, investing in the real estate that these stores need is a much better proposition.

Smart REIT is perhaps the best way to do this for a number of reasons. Firstly, you’ve got to like their top tenant. Wal-Mart accounts for more than 25% of Smart’s total revenue with 72% of its 139 different shopping centres anchored by the company founded by Sam Walton. If you’re going to hitch your wagon to a retailer, it might as well be the best one.

Smart has a total occupancy rate of 98.5%, while competitors are generally in the 90-95% range. This is because Smart’s portfolio is newer–and in better condition–and because other tenants are attracted to the foot traffic Wal-Mart brings. Other retailers benefit from this even if they compete with Wal-Mart. How many times have you gone into a neighboring store just to check it out?

A great dividend

Smart is a great operator that pays a nice dividend.

The company currently pays a dividend of 13.75 cents per share on a monthly basis–good enough for a yield of 4.5%. The company has a payout ratio of just over 80%, which is very sustainable.

Investors should expect another small dividend increase sometime in the next few months as the company continues to increase earnings. That would mark the third consecutive year of increasing the dividend.

Nice growth

Smart currently has some 31 million square feet under management. That number is poised to grow nicely over the next few years.

The company has identified several new projects with the most prominent being the Vaughan Metropolitan Centre. This is a massive real estate development that will include a brand new Go Train station, 1.5 million square feet of office space, 750,000 square feet of retail space, and some 12,000 condos. Smart will be the owner of the retail space.

That’s just one portion of Smart’s growth plan. It has some 4.25 million square feet of additional growth projects planned over the next few years.

Terrific overall performance

Since Smart REIT’s IPO in 2003, the company’s overall performance has been excellent.

According to a recent investor presentation, shares of the company formerly called Calloway are up 18% annualized in the decade since its IPO. A $100 investment in the company, including reinvested dividends, would be worth more than $950 today. In comparison, a $100 investment in the REIT sector would be worth approximately $400, and the same investment in the TSX Composite would total $310.

Smart REIT has been a terrific investment over the last 13 years. The company’s growth plans, its partnership with Wal-Mart, and its great portfolio should be enough to make it a similarly good investment over the next 13 years … or even longer.

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Fool contributor Nelson Smith has no position in any stocks mentioned.

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