Get $250 a Month in Passive Income From This Little-Known REIT

Discover a hidden gem in the REIT market and learn how to generate $250 per month in passive income with this lesser-known TSX stock.

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Investing in small-cap stocks may help you generate market-beating returns over time. Typically, small-cap stocks have the potential to outpace their larger peers and deliver robust gains to long-term investors.

For instance, it’s easier for companies with a market cap of less than $1 billion to double or triple in size compared to those valued at $10 billion or $50 billion. But that doesn’t make every small-cap stock a top investment bet. You still need to conduct your due diligence and create a list of stocks that have the potential to grow in size at an accelerated pace.

One such little-known REIT, or real estate investment trust, that has massive upside potential while trading at a compelling valuation is Slate Grocery (TSX:SGR.UN). In addition to the potential for capital gains, Slate Grocery currently offers shareholders a tasty dividend yield of 8.9%, making it a solid bet for income-seeking investors.

Why I’m bullish on Slate Grocery stock

Slate Grocery REIT owns and operates a portfolio of grocery-anchored properties in tier-two or secondary cities south of the border. Slate Retail owns more than 100 different properties spanning over 15 million square feet of gross leasable area in states such as Atlanta, Minneapolis, and Charlotte.

While investors remain concerned over rising e-commerce sales, demand for retail-based grocery outlets is expected to remain steady going forward. Further, investing in Slate Grocery REIT provides you with diversification, as you gain exposure to the commercial real estate sector.

In the first quarter (Q1) of 2023, Slate Grocery completed close to 600,000 square feet of leasing at attractive spreads driving occupancy rates and revenue growth higher. It reported sales of US$50.78 million in Q1 compared to US$39 million in the year-ago period.

The company confirmed new deals were completed at 17.1% above comparable average in-place rent and renewals at 8.4% above expiring rental values. It ended the quarter with an occupancy rate of 93.7%, allowing the REIT to report adjusted funds from operations, or AFFO, of $13.4 million.

Analysts tracking the REIT expect sales to surge 24% to $295 million in 2023 with adjusted earnings per share of $1.37. So, the stock is priced at 2.7 times forward sales and 9.5 times forward earnings, which is very cheap.

The stock is currently trading at a discount of 22% to consensus price target estimates. After accounting for its dividend yield, total returns will be closer to 31%.

How to get $250 per month in dividends

Slate Grocery currently pays investors a monthly dividend of $0.098 per share, translating to an annual payout of $1.18 per share. Its high dividend payout suggests you need to own 2,551 shares of the REIT, which are currently worth $33,520.

But investing such huge sums of money in a single stock is not advisable for most Canadian investors. Instead, you should identify similar TSX stocks with high dividend yields and diversify your equity portfolio.

Moreover, investing in Slate Grocery is not entirely risk free. Similar to most REITs, Slate Grocery uses debt to fund its expansion plans. Interest rate hikes in recent months have increased the cost of capital, negatively impacting earnings and cash flows.

Slate Grocery may lower its dividend payout if its payout ratio surges over 100% in the upcoming months.

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 Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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