Should Investors Buy This 10% Yield Now?

As Foolish investors know, exposure to the real estate industry is needed in every portfolio. It’s a proven wealth builder, and many REITs provide steady dividend yields to investors.

However, the dividend yields can range significantly; some REITs produce yields above 10%. With the stock market providing annual average returns in the range of 8-10%, can investors obtain superior returns by having a stock that pays out 10% with a chance of capital appreciation?

Cominar REIT (TSX:CUF.UN) is a REIT that’s a part of the 10% yield club; however, does it belong in your portfolio?

Here’s a closer look at the company.

Management’s focus

The company owns and operates over 500 commercial properties throughout Canada with over $8.3 billion in assets. In 2016, management made efforts to reduce the company’s debt levels after significant acquisitions in 2014. The company achieved this goal by bringing its debt ratio to 0.52, which is close to its debt ratio of 0.51 in 2013.

Now management is shifting its focus to improving its occupancy rates and financial results. The company currently has an occupancy rate of 92.4% which is significantly lower than some of the other large REITs in the market. However, this also indicates that there is room for improvement regarding the company’s current cash flows.

Is the yield safe?

Although the company hasn’t cut its dividend in the past seven years, the company’s payout ratio is now above 100%. In addition, the funds from operations per share have started to decline since the company’s expansion in 2014. Therefore, unless Cominar can increase its occupancy rates, it may struggle to service its dividend yield in the future.

Foolish bottom line

Until Cominar can improve its cash flows and increase its occupancy rates, I would suggest refraining from adding this stock to your portfolio. A high dividend yield is not a shortcut to accelerating returns, and investors are better off investing in companies with more conservative yields and potential for growth.

Building wealth takes time and patience, and there are no shortcuts. Therefore, investors should focus on adding fantastic companies with long-term prospects rather than chasing high yields.

Fool on!

1 Massive Dividend Stock to Buy Today (7.8% Yield!) – The Dividend Giveaway

The Motley Fool Canada’s top dividend expert and lead adviser of Dividend Investor Canada, Bryan White, recently released a premium “buy report” on a dividend giant he thinks everyone should own. Not only that – but he’s created a must-have, exclusive report that outlines all the alarming traits of dividend stocks that are about to blow up – and how you can avoid them.

For this limited time only, we’re not only taking 57% off Dividend Investor Canada, but we’re offering you special access to two brand-new reports, free of charge upon signing up. They will outline everything you need to know so you steer clear of dividend burn-outs AND take advantage of the dividend giants in the Canadian market.

While this offer is still available, you can find out how to get a copy of these brand-new reports by simply clicking here.

Fool contributor Colin Beck has no position in any stocks mentioned.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.