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Passive Income: Turn $20,000 Into a $975-a-Year Income Stream

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The housing market in Canada has just come off a record-breaking summer. There are questions regarding whether this trend will continue or whether people should brace themselves for a slowdown, as unemployment rates go up and the number of immigrants coming into the country slows down. There is also the fear of a second wave of the pandemic hitting, and that could put a dampener on the market.

This commercial REIT on the TSX yields 6%

There are two REITs that have withstood the carnage of the second quarter of 2020. First Capital REIT (TSX:FCR) builds, rents, and sells mixed-use urban neighborhoods. It operates both in the residential and commercial segments in Canada’s most populated cities like Toronto, Montreal, Vancouver, Edmonton, Calgary, and Ottawa.

Its properties are a perfect fit for large consumer businesses that are essential to neighborhoods. Grocery stores like Loblaw and Metro, medical, and professional services companies like Alberta Health Services and Allstate, pharmacies, and banks account for almost 50% of First Capital tenant list. This ensures that businesses and customers don’t have to work too hard to find each other. In a post-pandemic era, this is a very useful business model.

The company has had a challenging second quarter in 2020 thanks to the COVID-19 pandemic. Revenues fell almost 15% compared to the second quarter of 2019 to $165.7 million. Funds from operations fell to $47.5 million from $70 million. Same-property net income fell to $77.4 million from $92.6 million — a drop of 16.5%,

The company collected 75% of rent due in the second quarter without accounting for deferrals or adjustments. When you include them, the percentage moves up to 93%.

Since mid-May, governments in these regions began lifting lockdown restrictions for non-essential businesses as well, and this was a big boost to the company’s clients. As of August 5, approximately 96% of First Capital’s tenants were open for business. With its major market, Toronto, entering stage-three opening in August, numbers for Q3 should be much better.

The stock trades at $14.32, and analysts have given it a target of $17.79. When you add the 6% forward dividend payout, First Capital makes for a good addition to your portfolio. It’s a good combination of the dividend yield plus capital appreciation.

A residential REIT giant

I had written about Killam Apartment REIT (TSX:KMP) in July when it was trading at $17.6. Today, it is trading at $18.08 with a price target of $20.61. Killam is a major player in the residential real estate space in Canada with a focus on Eastern Canada.

The company reported its numbers for Q2 of 2020. Net income fell by $61.3 million for Q2 2020, down to $21.5 million from $82.8 million in the prior-year quarter, due to higher fair-value gains on investment properties. Funds from operations increased to $26.6 million from $23.7 million in 2019. The company has collected 98.6% of rents due to it in the second quarter.

Killam has generated a net operating income of 33% from apartments built in the last 10 years. It has a forward dividend payout of 3.8%, and it is a good addition given its market-beating returns in the last decade.

Bottom line

Investing $10,000 each in the two TSX stocks will help you generate $975 in annual dividend income.

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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.

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