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Is RioCan Real Estate Investment Trust a Must-Have Dividend Stock?

Anytime a best-in-class dividend stock has a yield pushing over 5%, you have to take pause and figure out why. That’s exactly what’s going on with RioCan Real Estate Investment Trust (TSX:REI.UN), which could very well be one of the best dividend stocks in Canada with a 5.21% yield. And with a yield like that, you have to wonder why a company that is in the best shape of its life is trading lower.

The problem primarily has to do with interest rates. Real estate investment trusts (REITs) are highly dependent on debt to finance new acquisitions; therefore, with the U.S. Federal Reserve increasing interest rates, some are worried RioCan (and other REITs) could suffer.

However, I believe that RioCan is primed to have tremendous success going forward and is a must-have dividend stock. Here are a few reasons to support that.

The first reason is because its debt is not as problematic as it used to be. During 2016, it sold its portfolio of U.S. properties, which it had acquired during the Financial Crisis, for net proceeds of $1.2 billion. It then started paying down debt, getting rid of large chunks that might be impacted by increasing interest rates. At the end of Q3 2015, the company’s leverage ratio was 46.1%. A year later, the company had decreased that to 39.6%, which is the lowest the company has ever had.

The second reason is because RioCan is working on a series of high-quality growth projects. It’s currently working on 15 projects that, when completed, will add 3.3 million square feet of retail space to its large empire. One of the more interesting projects is RioCan’s intention to build up to 10,000 residential units in tremendously lucrative urban locations. RioCan already owns the land and buildings in these locations, so building these units on top is far cheaper than launching a new location.

The third reason is because RioCan is truly operating perfectly. In Q3, its operating income increased by 9.2% year over year to $178 million. Its operating funds from operations increased to $131 million — a 16% improvement. A big reason for this is because its committed occupancy rate improved from 93.2% last year to 95.3%. Further, its same-store net operating income increased by 1.1%. It has more tenants and is making money from those tenants.

Investors might be a little unnerved by RioCan because its total network funds from operations dropped by 6.7%. However, this doesn’t worry me in the slightest because if you recall, RioCan sold its U.S. properties for $1.2 billion in net proceeds. A small drop in operating funds from operations is well worth the giant payday (and cut in debt).

And finally, there’s the lucrative dividend. A 5.21% yield gets you 11.7 cents per month. If you were to buy 1,000 shares, you’d spend $27,080 (plus any commissions you might have to pay). Each month, you’d receive a cheque for $117. After a year, you’d be sitting on $1,404, which is like receiving a rent cheque. And if you were to invest that money in RioCan’s DRIP, your year-end dividends would be even greater.

At the end of the day, I’m bullish on RioCan. Its debt is down, it has tremendous growth opportunities, its operating income is growing, and its dividend is well financed. Fear of interest rates don’t outweigh the positives of RioCan.

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Fool contributor Jacob Donnelly has no position in any stocks mentioned.

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