Value investors are flocking to Canadian Tire (TSX:CTC.A) stock. Despite a century-long history of growth, shares have been crushed during the market crash. They’ve rebounded a bit, but are still two-thirds lower than their previous highs.
But here’s the thing: there’s a stock that’s even better than Canadian Tire. Investing in this company is like betting on Canadian Tire, but with significantly lower risk. And due to the market crash, you can now secure a 6.1% dividend yield.
Which company are we talking about? It’s none other than CT Real Estate Investment Trust (TSX:CRT.UN).
Canadian Tire’s landlord
Every time you visit a Canadian Tire store, you also benefit CT Real Estate. That’s because CT Real Estate owns the land underneath more than 300 Canadian Tire locations. It’s essentially Canadian Tire’s landlord.
We’ve seen this happen with other large retailers over the years. Owning property is a very different business from operating a retail store. So, retailers split their real estate divisions into separate companies.
Importantly, the companies usually maintain a very close relationship. Canadian Tire, for example, still owns CT Real Estate stock. Their contracts include preferential treatments, meaning CT Real Estate has the right of first refusal on owning the land underneath any future storefronts.
In total, nearly 92% of CT Real Estate’s rent base comes from Canadian Tire. The remainder is largely from adjacent stores in the same development. The company owns 27.6 million square feet of leasable space, with a fair value of around $6 billion. Because Canadian Tire is such a dominant part of its portfolio, 95% of its rental income is from investment-grade tenants.
Cover your downside
This company gets even better. CT Real Estate contracts its space on long-term agreements. The weighted average remaining lease term is 10 years, although some properties are contracted until 2039. And that’s with an occupancy rate of 99.1%, one of the highest figures in the industry. Plus, most contracts have annual pricing escalators to protect CT Real Estate from inflationary pressure.
This is really a simple story: as long as Canadian Tire succeeds, so will CT Real Estate. And in times of turmoil, like the current coronavirus pandemic, CT Real Estate stock will show lower volatility.
Since the year began, CT Real Estate stock has dropped by 18%. That’s a smaller dip than the rest of the market. Canadian Tire stock, for comparison, is down by 29%.
It’s not often that you can buy a low-downside stock at a discount. Otherwise, it wouldn’t be considered a low-downside stock. But CT Real Estate isn’t a rapid-growth company. It’s a simple business: it acts as the landlord for a major retailer, collects the regular rental income, and distributes it to shareholders in the form of a dividend. The recent downturn has pushed that dividend yield up to 6.1%.
This stock is looking like the perfect choice for income investors as well as investors that want to limit their market risk.
Canadian Tire has plenty of liquidity to survive, and its long-term contracts with CT Real Estate make it difficult to pull out. Even if there’s no bump in the dividend this year, CT Real Estate investors can anticipate a steady 6.1% dividend with significantly mitigated volatility.
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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 Ryan Vanzo has no position in any stocks mentioned.