1 Under-$18 Dividend Stock to Buy for Monthly Passive Income

Most Dividend Aristocrats on the TSX trade in the $50-$100 range and pay quarterly dividends. They have the advantage of rich dividend histories and dividend growth. What if you could get annual dividend growth and monthly passive income for less than $18 per share? 

Are REITs a better option for monthly passive income?

Real estate investment trusts (REITs) are a better option when you seek passive income. By definition, a REIT invests its capital to buy and develop properties and then rent it out or sell it. Qualified REITs are exempt from corporate tax, as they transfer most of their income to shareholders. 

A REIT saves 37% of corporate tax, while a company (whether or not it pays dividends) pays corporate tax. Hence, REIT’s monthly payouts are called distributions and not dividends. While these distributions are taxable for investors, you can also get a tax exemption if you invest in REITs through the Tax-Free Savings Account (TFSA), where withdrawals are tax-free. 

So, I will tweak the title and tell you about a distribution stock you can consider buying for monthly passive income:

An under-$18 stock for monthly passive income

Many Canadian REITs started trading on TSX after 2011 when the government removed the tax advantage for Canadian income trusts but retained it for qualified REITs. 

Founded in 2013, CT REIT (TSX:CRT.UN) is one of the few Canadian REITs that grow its distribution rate every year in July. It is also one of the few REITs that didn’t slash distributions during the pandemic when most retail REITs did. In fact, it increased distribution in July 2021 (3.6%) and July 2022 (3.9%). 

Let’s recreate a scenario of how your passive income would look today had you invested in CT REIT in 2014. In January 2014, the stock was trading at $11.1, which means a $1,000 investment would have bought you 90 shares and a $5,000 investment would have bought you 450 shares. Once you have your share count, plug it into the below table and see how much monthly passive income you would have earned.

As this income is tax free in TFSA, you know the entire amount is yours. 

Why invest in this under-$18 distribution stock? 

Don’t just look at the table and start making plans for your passive income. While it is true that CT REIT has not announced any dividend cuts since 2014, it is also true that it never faced a recession or a housing bubble. Canada’s property prices have soared for over a decade. 

Always ask why you should invest in a stock. And when something changes and you lose that reason, revise your estimates or exit your position. 

I am bullish on CT REIT for four reasons: 

• It has a 99.2% occupancy rate, which means it is getting rent from most of its properties. 
• The 8.5-year weighted average lease means its rental income could keep coming for over eight years.
• Its parent Canadian Tire is its biggest tenant, accounting for over 90% of the REIT’s rent. 
• Every year, the REIT develops and intensifies some Canadian Tire stores to earn additional rent over and above the 1.5% average rent increase. 

Till these reasons remain, the REIT is a good investment for an inflation-hedged monthly passive income. But every stock has its risks, too. 

• If a recession forces Canadian Tire to close several stores to cut costs, reducing CT REITs occupancy rate below 95%. 
• If the REIT’s distribution-payout ratio reaches or exceeds 90%. Its first-quarter payout ratio is 73.8%.

I might go bearish on the stock if the above risks trigger.

The amount to invest in this stock differs from person to person. But to give you a ballpark ratio, don’t invest more than 8-10% of your entire investment in one stock. Diversify your portfolio across sectors.