Income Investors: 2 Canadian REITs With Yields of 5%. Which Is Better?

Begin earning passive rental income from buying Canadian REITs. Here are two that provide yields of about 5%.

| More on:

Image source: Getty Images

Canadian real estate investment trusts (REITs) are great sources of income, especially since most pay monthly cash distributions, as do the REITs discussed here. Similar to other companies, though, REITs are faced with higher inflation, higher labour costs, and rising interest rates today. After reviewing both stocks, one appears to be a better buy for a yield of roughly 5%.

Chartwell Retirement Residences

Normally, seniors housing is a pretty good place to find cash cows. The COVID-19 pandemic shook the fundamentals of Chartwell Retirement Residences (TSX:CSH.UN). What’s most obvious is the Canadian REIT’s cash flow reduction in 2020 and 2021. So far, management has maintained its monthly cash distribution, which it knows is important to its unitholders.

For the first quarter, Chartwell experienced a 2.4% decline in the weighted average occupancy in its retirement same-property portfolio to 76.5% versus 78.9% a year ago because of “lower move-in activity as a result of the pandemic,” as explained in its Q1 release.

Light is coming up at the end of the tunnel. Management expects occupancy to improve this month. The company results could stabilize as soon as this year. In the first quarter, Chartwell saw a marginal improvement in its resident revenue. Unfortunately, its property operating expense increased at a higher rate, no thanks to the pandemic, higher inflation, and higher labour costs.

Chartwell’s financial position appears to be worse than before. At the end of Q1, it had liquidity of $374.8 million, including $160.0 of cash and cash equivalents. Its interest coverage ratio was 2.6 times versus 2.8 times a year ago. And its net debt to adjusted EBITDA ratio was 10.4 versus 9.9.

The stock dipped 12% from its 52-week high and currently offers a juicy yield of just over 5%. Cash distribution growth can potentially resume between 2023 and 2024.

Let’s move on to Dream Industrial REIT (TSX:DIR.UN) that offers a similar yield but a better margin of safety in multiple ways.

Dream Industrial REIT

First, Dream Industrial REIT offers a bigger margin of safety for its cash distribution. Second, it provides better safety for investors’ money today, because the stock appears to be more attractively valued. Third, the REIT also has a better financial position.

At about $14 per unit at writing, the dividend stock trades at a decent discount of about 24% from the analyst consensus price target. Its funds-from-operations (FFO) payout ratio is estimated to be approximately 79% this year, and its FFO growth rate is expected to be in the high single digits in the foreseeable future.

The general operating environment is simply better in the industrial REIT industry. For the first quarter, the Canadian REIT increased its net operating income by 40% to $65.3 million. FFO growth was 62% year over year to $56.6 million, while it increased 16% to $0.22 on a per-unit basis. Its in-place occupancy at the end of Q1 was 97.6%, which was an improvement of 1.9% compared to a year ago.

Organic growth is strong as Dream Industrial REIT “has signed approximately 2.8 million square feet of renewals and new leases across its portfolio since the beginning of the year, at an average rental spread of 21.3% over prior or expiring rents,” as pointed out in its Q1 release.

The Canadian REIT enjoys an investment-grade rating of BBB from DBRS. At the end of Q1, its net debt to total assets ratio was 25.8% versus 28.7% a year ago. And its interest coverage ratio was 10.4 times versus 4.8 times.

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 recommends DREAM INDUSTRIAL REIT. Fool contributor Kay Ng has no position in any of the stocks mentioned.

More on Dividend Stocks

edit Person using calculator next to charts and graphs
Dividend Stocks

Better Buy: Fortis Stock vs Enbridge

Fortis stock and Enbridge are top dividend stocks on the TSX today. Which stock is better buy for safe dividend…

Read more »

Canadian Dollars
Dividend Stocks

How to Make $1,500 in Passive Income 4 Times a Year

Blue-chip TSX stocks such as Enbridge can enable investors to create game-changing wealth over the long term.

Read more »

IMAGE OF A NOTEBOOK WITH TFSA WRITTEN ON IT
Dividend Stocks

TFSA: How to Easily Turn $10,000 Into $500/Year of Passive Income

You don't need to be a stock market expert to turn $10,000 into a $500 of tax-free passive income. Here's…

Read more »

protect, safe, trust
Dividend Stocks

Worried About a Recession? 2 TSX Blue-Chip Stocks to Protect Your Capital

If you fear a recession coming on soon, here are two blue-chip Canadian stocks to add to your portfolio for…

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

New TFSA Investors: 2 Top TSX Stock to Create a Self-Directed Retirement Fund

Top TSX dividend stocks are now on sale for new TFSA investors.

Read more »

money while you sleep
Dividend Stocks

Worried About the Market? 2 Dividend Stocks That Let You Sleep at Night

Here's why Restaurant Brands (TSX:QSR) and Enbridge (TSX:ENB) are two top dividend stocks to buy in this uncertain market right…

Read more »

money cash dividends
Dividend Stocks

How 1 Absurdly Cheap Stock Can Generate $100 in Monthly Passive Income

You can generate $100 or more in monthly passive income from one high-yield stock trading at an absurdly cheap price…

Read more »

Retirees sip their morning coffee outside.
Dividend Stocks

How I’d Invest $1000 in February to Make Easy Passive Income

Looking to earn some extra passive income in February but don't have much cash? Build an easy portfolio with these…

Read more »