Passive Income: 7 Reasons to Own This Monthly Dividend Stock

This Canadian REIT is a great example of what a perfect passive-income investment should look like. Right now, it’s a good buy, too!

| More on:
Payday ringed on a calendar

Image source: Getty Images

Passive-income investments should give you peace of mind to own them. They should require little attention from you (if at all) to manage them. In fact, the best passive-income investments should only require you to buy them at good valuations and do nothing more but hold them for passive income. Here’s one monthly dividend stock I own for passive income.

A big dividend stock

The number one thing that attracts passive-income investors to Canadian Net REIT (TSXV:NET.UN) is its high dividend yield. Its yield is close to 4.3% at writing, which is substantially higher than the Canadian stock market’s yield of approximately 2.5%. So, for each dollar invested, investors can get about 70% greater income! Its funds from operations (FFO) payout ratio of about 52% is sustainable.

Stable business and cash flow

Canadian Net REIT’s top tenants are grocery and convenience stores, including Loblaw, Walmart, Sobeys, metro, Parkland, and Couche-Tard. It can rely on these defensive tenants for rental income.

It owns a portfolio of quality commercial real estate leased on a triple-net or management-free basis. Triple-net leases that entail variable costs like insurance, taxes, and maintenance are taken up by tenants. Management-free leases, as the name implies, mean that tenants are responsible for managing the property or hiring another party to do it. These types of leases essentially lower the cost of operation for the REIT. Combined with the REIT’s average lease term to maturity of about seven years, it produces relatively stable cash flows.

Above-average growth

Canadian NET REIT’s cash flows are not only stable but also growing. Since 2012, it has increased its FFO per unit at a compound annual growth rate (CAGR) of 14.1%. This translated to cash distribution growth at a CAGR of 10.5%. Both are above-average growth rates! In essence, it has increased its dividend sustainably by raising it slower than its cash flow growth.

This Canadian REIT is perfect for the TFSA

REIT cash distributions are taxed differently than dividends. A large portion of Canadian Net REIT’s cash distribution in the last 10 years has been returns of capital that essentially reduce the cost basis of investors’ stock investments. To sidestep the hassle of keeping track of your average cost basis in a non-registered account, buy and hold units in your TFSA for passive monthly income tax free.

Discounted dividend stock

At $7.93 per unit, the defensive REIT is discounted by 15% according to the 12-month analyst consensus price target of $9.33 across six analysts shown on Yahoo Finance. It trades at about 13.8 times FFO, which is a decent valuation to pay for its expected double-digit growth rate.

Diversification

The stable REIT generates rental income across 95 properties — up from 74 properties at the end of 2020. The REIT continues to acquire suitable properties. By buying the REIT, investors gain immediate additional diversification for their real estate investment portfolios, which could include their homes, rental properties, and other REITs.

Low trading volume and low volatility

The stock has dipped only 4% from its recent high. On most market days, the stock seems to hardly move. In the long run, over the last 10 years or so, it has delivered annualized returns of approximately 13.6%, which is above average versus the average market returns of 7-10%.

Its low volatility and low trading volume make it the perfect addition to passive-income investment portfolios. It may be helpful to buy on down days or set a limit order for the longest expiry date to increase your chance of filling your order at the lowest prices.

Essentially, all you have to do is buy the stock at good valuations when you have some extra money and watch your monthly passive income grow. Don’t just depend on one stock, though. Rather, build a basket of dividend stocks you can rely on for passive income!

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.

The Motley Fool owns and recommends Alimentation Couche-Tard Inc. The Motley Fool recommends Canadian Net Real Estate Investment Trust. Fool contributor Kay Ng owns shares of Canadian Net Real Estate Investment Trust and Parkland.

More on Dividend Stocks

Dividend Stocks

2 Commercial REITs for Prudent Investors

Commercial REITs offer you exposure to asset classes most investors don’t have access to, but they also offer robust growth…

Read more »

Community homes
Dividend Stocks

1 Real Estate Stock to Grab at a 37% Discount

It’s difficult to pass on a good discount, especially if it’s on a stock that has proven its mettle and…

Read more »

Retirement plan
Dividend Stocks

Don’t Let a Recession Eat Up Your Retirement Money

You don’t want to retire in an economy moving towards recession and lose some of your retirement money. Guess what?…

Read more »

hand using ATM
Dividend Stocks

3 Stocks to Turn Your TFSA Into a Cash-Printing Machine

When looking for stocks for a passive income stream, your approach should be more "holistic" than simply focusing on the…

Read more »

analyze data
Dividend Stocks

RRSP Investors: 2 Top TSX Dividend Stocks to Buy on the Latest Pullback

RRSP investors are finally getting a chance to buy great TSX dividend stocks at cheap prices.

Read more »

Dividend Stocks

2 Canadian Dividend Stars for TFSA Passive Income

Top Canadian financial stocks are trading at discounted prices and offer TFSA investors great dividends for passive income.

Read more »

exchange traded funds
Dividend Stocks

3 Low-Risk ETFs for Conservative Investors

Not all low-risk ETFs are the same. And even though the return potential might not be comparable to higher-risk ETFs,…

Read more »

edit Safety First illustration
Dividend Stocks

3 Ultra-Safe TSX Stocks That Also Pay Investors a Dividend

Dividend-paying stocks such as Brookfield Infrastructure and Algonquin Power should be on the watchlist of income and value investors.

Read more »