The Bank of Canada is raising the benchmark interest rate to fight inflation. Rising interest rates are, in turn, trickling down to mortgage rates. Variable rates remain more easily digestible than fixed rates. However, there is no ambiguity with fixed mortgage rates — you’ll know exactly what you’ll be paying each month for your mortgage. In contrast, as the name implies, variable-rate mortgages have an interest rate that changes over time. Since interest rates are rising, the expectation is that the rates for variable-rate mortgages will also rise over time.
Right now, the best five-year variable mortgage rate is 1.95%, while the best five-year fixed mortgage rate is 3.39%. To overcome rising mortgage rates, you can boost your passive income through dividend investing.
Aiming for an initial yield of 3.4% and dividend-growth rate of 5-10% sounds like a reasonably achievable goal. On a fairly valued dividend stock, these metrics target approximated total returns of 8.4-13.4% assuming the dividend growth follows similar earnings growth. Of course, if you can get higher income and growth than that consistently, that would be even better.
Since we’re on the topic of real estate investing (our homes are one of the biggest investments of our lives), I’ll use Canadian Net REIT (TSXV: NET.UN) as an example of passive income that has been outperforming our income and growth targets.
Canadian Net REIT passive-income example
Canadian Net REIT invests in commercial real estate properties. So, it adds diversification as a real estate investment for homeowners. Its portfolio is comprised of about 95 income-generating properties. Its triple-net and management-free leases improve the stability of its cash flow. Importantly, it selects tenants that are revenue-driven and require the locations to be crucial for their businesses. Consequently, most of the time, there’s little cash flow disruption (if at all) for the REIT. For instance, its top tenants are grocery chains like Loblaw, Sobeys, Walmart, and Metro.
What’s enticing about the REIT is its defensiveness. Even during the pandemic year of 2020, it maintained a very high occupancy rate of 99% and continued growing its cash flow. In fact, it increased its funds from operations per unit by 18% and raised its cash distribution by 15% that year.
Today, the discounted REIT yields about 4.2%. Based on a $100,000 TFSA investment, it would generate tax-free income of $350 per month. Its five-year dividend-growth rate is about 13.5%, which is highly attractive versus other REITs that often experience little to no growth.
One additional growth component that Canadian Net REIT has is its acquisition and development efforts. It has been increasing its cash flow at a faster pace than its dividend growth.
Because of its small size and high insider ownership of about 14%, the dividend stock has a low trading volume. However, this should not matter for long-term investors that want a passive-income helper to contribute to their mortgage payments.
In the foreseeable future, the REIT will continue to pay a safe dividend that will likely grow at a high single-digit rate — maybe even north of 10%.
The Foolish investor takeaway
Canadian Net REIT is great for helping you pay your mortgage. Surely, you should hold more than one stock for that purpose. Diversify across a portfolio of such defensive dividend stocks with high yields and growing dividends that you can buy and hold for long-term passive income.
