Yield Alert: RioCan REIT (TSX:REI.UN) Now Pays a 10.5% Dividend

Investors are beginning to worry about RioCan REIT (TSX:REI.UN) and it’s 10.5% yield. Here’s why I’m not one of them.

| More on:
Various Canadian dollars in gray pants pocket

Image source: Getty Images

RioCan REIT (TSX:REI.UN) has long been one of Canada’s top REITs. It’s easy to see why, too.

Led by CEO Ed Sonshine, the company’s strategy is simple. It looks to own high-quality retail real estate in large centers, with a focus on the largest Canadian markets.

At one point the company expanded into the United States, acquiring a portfolio of property in the aftermath of the 2008-09 Great Recession, but that was sold with the proceeds being used to pay down debt.

As it stands today, the company owns 222 different properties spanning some 38 million square feet in space, including development properties, makes it one of Canada’s largest retail REITs. In fact, RioCan has long been considered one of the nation’s top REITs. It has become a staple in many portfolios.

With COVID-19 severely impacting the retail sector, it’s only natural investors would start to worry about one of Canada’s largest retail landlords. Will RioCan survive this crisis? Will its succulent 10.5% dividend get cut?

Let’s take a closer look.

A new world

Any investor who argues RioCan won’t be impacted by COVID-19 is simply lying to themselves. It’s already had a big impact on the company.

Most of RioCan’s largest tenants are doing just fine, with grocery stores and pharmacies dominating that list. But there are also significant cracks in the portfolio, with other top tenants like movie theatres and gyms still looking like they’re months away from reopening.

This weakness showed up in RioCan’s April numbers. It collected 55% of April’s rent without issue. An additional 28% of April’s rent will be paid over the next few months. But 17% of all rents were deferred. Will this ever be collected?

Then there’s the impact COVID-19 will have on RioCan’s development program. At this point, construction is still an essential service and development continues. But what about future projects?

After all, RioCan has dozens of development projects planned over the next decade or so, with a big emphasis on maximizing the value of its Toronto portfolio. If the economy continues to stagnate it’ll be hard for RioCan to access funds for expansion.

It’s obvious things aren’t great for the company right now, and the share price reflects just that. As I type this, RioCan shares are below $14 each, with is a decline of approximately 50% over the last few months alone.

With shares at approximately 10 times trailing earnings, I think that’s too cheap for such a high-quality company with such great assets.

What about the dividend?

RioCan shares are so beaten up the dividend yield now exceeds 10%. Does that make this a risky payout?

There are a few factors that contribute to the stability of this dividend. First, RioCan has a lot of balance sheet flexibility. It has $1 billion in cash today and more than $9 billion worth of unencumbered property. It also pays out less than 80% of normalized earnings back to investors as distributions.

CEO Ed Sonshine also came out recently and declared the dividend safe — investors have to like that vote of confidence.

Let’s look at it another way. As it stands today, RioCan pays out $38 million per month in dividends. The actual number is likely lower, as many investors choose to receive new shares instead of dividends. This means the company can maintain dividends for more than two years based on just the cash on hand alone — and that assumes it only breaks even on rent collection.

What are the chances this COVID-19 pandemic lasts another two years?

The bottom line on RioCan’s dividend

It sure looks to me like RioCan will continue to pay its dividend. The company has plenty of liquidity, great long-term assets, and thus far, rent collection hasn’t been bad.

With shares currently flirting with a multi-year low, it looks like a pretty good opportunity to finally add this high-quality real estate stock to your portfolio.

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 EST UN.

More on Dividend Stocks

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »

Golden crown on a red velvet background
Dividend Stocks

Dividend Royalty: 3 Fabulous Stocks to Buy Now for Decades of Passive Income

Rogers Communications stock and Canadian Natural Resources stock could pay you dividends for decades to come.

Read more »