Who doesn’t like a little passive income?
I’m not kidding when I say passive income has changed my life. Watching the income steadily come in from my portfolio has given me the freedom to take risks, go on more holidays, and generally live an unconventional life. Sure, I still stress a little about money, but thinking about the success of my portfolio usually makes those nasty thoughts go away.
If you want to join me in earning passive income, this article is for you. Yes, it’ll likely take years for your portfolio to generate enough income to really make a difference in your life, but the wait will be worth it.
Here are two real estate stocks that deliver some very generous dividends, making them the perfect choice for folks who have just caught the passive income bug.
RioCan Real Estate Investment Trust (TSX:REI.UN) is one of Canada’s largest owners of retail space. Even after selling some non-core assets to focus more on Canada’s largest cities, the company still owns 230 properties spanning nearly 40 million square feet of gross leasable area. Chances are if you live in one of Canada’s big cities, you regularly shop at a RioCan-owned building leased to a top retailer.
The company isn’t content to sit on its laurels, so it has a massive expansion program planned. RioCan is sitting on some very valuable real estate — especially in the Toronto market — that is currently being underutilized. The company plans to take this property and convert existing retail space into multi-use buildings with shops on the bottom and either apartments or office space on top. This development plan should add nearly 30 million square feet to RioCan’s total portfolio in the next decade or so.
RioCan’s balance sheet is pristine, giving it plenty of financial flexibility to pay for this expansion. Its existing portfolio now has a 97.1% occupancy ratio, which is among the best in the whole sector. And the company has knocked its payout ratio down to under 80% of funds from operations, which ensures the 5.5% yield will be safe. In fact, I wouldn’t be surprised if the company increased its dividend.
The next company I’d like to profile is Automotive Properties REIT (TSX:APR.UN), an interesting niche player with oodles of growth potential ahead of it.
Automotive Properties owns 60 car dealership properties, which it then leases back to companies that operate the dealerships. The portfolio consists of a little over 2 million square feet of gross leasable space.
The big risk with Automotive Properties is the underlying tenants go bust. And the company is overly dependent on Dilawri Group, Canada’s largest auto dealership, which accounts for a little more than 60% of its total revenues. But Dilawri is relatively strong and these dealerships are nice buildings in good locations. If something goes wrong and the main tenant is forced to close locations, somebody will come along and rent them.
The REIT’s growth has been amazing since its 2015 IPO. The portfolio has increased from 26 properties to 60 properties in just four years, and the company will likely have many more opportunities to buy property from Dilawri and other dealership operators. Dilawri, for example, acquired six dealerships around Vancouver recently. I wouldn’t be surprised if at least some of these properties get flipped to Automotive Properties.
Finally, you can’t beat Automotive Properties’ dividend. The stock currently yields a robust 7.7% with a payout ratio of approximately 80%.
The bottom line
$10,000 invested in RioCan stock and $10,000 invested in Automotive Properties REIT would generate more than $1,300 in passive income each year. That’s enough for a nice weekend away, a few loads of groceries, or a cell phone bill. What you decide to do with your passive income is up to you; the important part is getting started on this journey.
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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 Nelson Smith owns shares of RioCan Real Estate Investment Trust and Automotive Properties REIT.