Are you looking to increase your monthly income?
If so, you might want to consider investing in Canadian real estate investment trusts (REITs).
REITs are real estate portfolios that trade on the stock market. They are legally more similar to exchange traded funds (ETFs) than stocks, but in practical terms, they are real estate companies whose shares you can buy.
How can REITs boost your monthly income?
Through dividends! REITs typically pay a large portion of their profits to shareholders in the form of dividends. In fact, they usually pay out 90% of their profits or more. This results in REITs having very high dividend yields (i.e., dividend per share divided by the share price), resulting in high income for shareholders.
Why REITs offer high income
REITs offer high dividend income because they are legally required to. REITs pay very low taxes, which is a big advantage for them. However, in order to qualify as REITs (as opposed to real estate corporations), they need to pay 90% of their profit out in the form of dividends. If they don’t, they are considered companies and are taxed accordingly. As a result, REITs tend to offer a lot of dividend income.
Two examples of REITs offering high income
The Northwest Healthcare Properties REIT (TSX:NWH.UN) is a Canadian healthcare REIT that has a 7.5% dividend yield at today’s prices. It has always had a fairly high yield, but this year, the yield is even higher than normal, because the unit price fell. As you can see in the chart below, NWH.UN’s price has fallen this year. However, its business is actually doing reasonably well. In its most recent quarter, Northwest’s revenue grew 2.1% and its operating income (profit minus interest and taxes) grew 1.8%. Its profit, as measured by net income, declined a bit, but the positive revenue growth suggests that the long term trajectory is solid. Northwest Healthcare has a big advantage in that it gets most of its rental income from healthcare organizations, which are funded by the government. This government funding gives NWH.UN’s tenants a high ability to pay, resulting in a very high collection rate. For example, in 2020, when the COVID-19 pandemic was wreaking havoc at retail and mall REITs, NWH.UN collected 97.5% of its typical year’s rent. Outstanding!
Riocan Real Estate Investment Trust (TSX:REI.UN) is a mixed retail and apartment REIT. It owns a number of “prestigious” Toronto properties, such as 11 Yorkville and the eCentre. These kinds of properties attract a wealthier-than-average tenant base, resulting in high rental income for REI.UN. The proof is in the pudding. In its most recent quarter, Riocan REIT delivered $0.43 in funds from operations (“FFO”) per share, an increase of 7% compared with the same quarter last year. FFO is the main profit metric that REIT investors look at. RioCan’s net income technically declined for the quarter, but few REIT investors see net income as the best profit metric, as it doesn’t reflect dividend-paying ability. RioCan did quite well in terms of the main profitability metric that REIT investors think about (FFO), and it re-affirmed its commitment to growing it by 5% to 7% for full year 2022. It was a solid showing for Canada’s best known REIT, and the full year picture is looking good, too.