Investing in real estate investment trusts (REITs) provides you with exposure to an entirely different asset class. Moreover, as these companies distribute a significant portion of their cash flows in the form of dividends, investors can benefit from a higher yield.
The best REITs aim to acquire and grow their base of cash-generating properties, which should support higher dividend payouts over time. But as is the case with every asset class, investing in REITs also carries certain risks.
For example, REITs typically raise debt to support their expansion plans and acquire additional properties. So, their earnings will nose-dive when interest rates increase due to the higher cost of debt.
Moreover, several commercial REITs may experience lower occupancy rates in the upcoming decade due to the work-from-home trend.
Despite these risks, investing in REITs offer you a chance to gain access to the real estate market at a low cost, further diversifying your portfolio. Here are two top Canadian REITs that provide shareholders with attractive dividend yields in 2023.
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RioCan REIT stock
One of the largest REITs in Canada, RioCan (TSX: REI.UN), owns, manages, and develops retail-focused mixed-use properties located primarily in high-density transit-oriented regions. It ended the first quarter (Q1) of 2023 with 191 properties and a total net leasable area of 33.5 million square feet. It further has a development pipeline of 14 million square feet zoned for development.
RioCan pays unitholders a quarterly dividend of $0.27 per share, indicating a dividend yield of 5.6%. In Q1 of 2023, RioCan reported funds from operations per share of $0.44, suggesting a payout ratio of less than 60%, which is quite sustainable. So, the REIT has enough room to increase its dividends, lower its debt profile, and reinvest in growth.
Between 2022 and 2026, RioCan expects to increase FFO by 5% and 7% annually, allowing it to increase distributions by at least 4% each year. It also aims to generate shareholder returns of between 10% and 12% annually in this period.
A majority of RioCan’s properties are grocery-anchored and mixed-use urban centres, which are recession resistant with high occupancy rates. Investing in this REIT also offers you a diversified and defensive tenant mix.
Armed with ample liquidity, a large pool of unencumbered assets, laddered debt maturities, and low floating rate exposure, RioCan is a top TSX to own in 2023. RioCan stock also trades at a discount of 29% to consensus price target estimates.
Dream Industrial REIT
Dream Industrial REIT (TSX: DIR.UN) owns, manages, and operates a portfolio of 321 industrial properties totalling 70.4 million square feet of gross leasable area. These properties are located in Canada, the U.S., and Europe.
Dream Industrial aims to deliver strong returns to unitholders by securing cash flows that are backed by its diversified portfolio and investment-grade balance sheet.
It pays unitholders a dividend of $0.70 per share annually, indicating a yield of almost 5%. In addition to its dividend yield, RioCan stock has returned 203% to shareholders in dividend-adjusted gains in the last 10 years, easily outpacing the TSX index.
Despite an inflationary and difficult environment, Dream Industrial increased funds from operations by 13.3% year over year to $0.25 per unit in Q1 of 2023. Its comparative properties’ net income also grew 13% to $74.8 million in the March quarter.
