Why I’m Buying This TSX Stock for Passive Income

This TSX stock is a real estate investment trust that’s generating strong returns, as demand and rental income soar.

| More on:
A close up image of Canadian $20 Dollar bills

Image source: Getty Images

When we talk about passive income, the conversation always centres on safety. I mean, what good is a passive-income stream if it will be gone tomorrow? This is why any TSX stock that we rely on for this passive income must have staying power. It’s not always an easy thing to determine, but it’s well worth the effort.

BSR Real Estate Investment Trust (TSX:HOM.UN) is an $850 million real investment trust (REIT) that’s been around since 1956. Please read on as I list reasons why this TSX stock is a safe place to go for passive income.

This TSX stock hits the nail on the head

There are 18 states that fall withing the Sunbelt region of the United States. This region has been fast-growing, with low unemployment rates and a young population. BSR’s core markets include cities within the Sunbelt that have some of the lowest unemployment rates in the U.S., including Austin, Dallas, and Houston.

BSR owns 31 multi-family real estate properties in these booming areas. So, it’s no wonder that BSR has been so prosperous. For example, BSR has grown its revenue from $64 million in 2018 to $119.5 in 2021 — that’s an 87% growth rate over that period. Mort recently, the growth is continuing strong. In fact, in the latest quarter (Q3 2022), revenue increased 11%. Also, net operating income increased 10%, and adjusted funds flow from operations increased 27%.

Being in the right location has definitely been a core part of BSR’s success. Looking ahead, continued strong fundamentals are foreshadowing continued success. For example, in the latest quarter, strong rental demand enabled double-digit rental increases. A 12.3% rate increase on new leases, combined with a 10.3% rate increase on renewals resulted in a blended 11.2% rate increase.  

Strong returns set up strong passive income

These strong fundamentals have driven strong returns at BSR. For example, the company’s return on equity (ROE) is approximately 40%. Also, it’s return on investment (ROI) is 17%. These returns are due to the strong industry fundamentals. But they’re also due to strong management over at BSR.

Management’s stated objective is to provide sustainable and growing distributions through both organic rental growth and acquisitions. That’s great, as it coincides with our goal of generating passive income. Right now, BSR’s dividend yield is a solid 3.63%. Also, its payout ratio is a healthy 19% — clearly, that dividend has room to go higher.

Lastly, BSR’s debt load, or leverage, is reasonable. As a REIT, we fully expect the balance sheet to be filled with debt, as buying and/or building properties is a very capital-intensive business. But BSR’s debt to total capitalization is at a reasonable 50%. This reflects the company’s strong financial management and conservatism. And it’s a very key selling point for this passive-income stock.

Rising interest rates are of concern for this TSX stock

Of course, rising interest rates are a consideration for all businesses these days. The rise has been so fast and so sharp that it surely will have at least some negative ramifications. But it doesn’t have to get in the way of this passive-income stream.

BSR has taken actions to negate or lessen the effects of rising rates. For example, it’s spread out its debt maturities over time. Currently, there are no debt maturities until 2024. Also, BSR has hedged its interest rate exposure through the use of interest rate swaps. Essentially, this means that all of its debt is fixed or economically hedged to fixed rates at a weighted average rate of 3.4%.

Trading below book value

Lastly, BSR is currently trading below book value. This, combined with the strong returns that BSR has been generating, leads me to my conclusion that BSR is a really great opportunity today. Thus, we can get a solid passive-income stream at bargain prices.

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.

Fool contributor Karen Thomas has no position in any of the stocks mentioned. The Motley Fool recommends BSR Real Estate Investment Trust. The Motley Fool has a disclosure policy.

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 »

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 »