Are you planning out your investments? Make sure you have diversified your money across different assets, each having a unique way to give returns. Many people consider buying property to get passive income. While it is one of the safest assets, it is also the most expensive to acquire. Instead, you can invest in a real estate investment trust (REIT) that holds properties and earns rental income. REITs might sound like a bad idea, as property prices have been falling.
Commercial REITs vs. retail REITs
Some office REITs slashed distributions. S&P Global also downgraded its ratings of U.S. regional banks over concerns about increasing commercial real estate loan delinquency rates. Even hedge funds exited their position from commercial real estate.
While commercial real estate mainly caters to office buildings, retail REITs are vulnerable to slowing economic activity. Many retail REITs slashed distributions during the pandemic. But one good thing about real estate is it always recovers. The 2008 financial crisis hit property prices hard. But property prices recovered with time.
You need a REIT with strong backing that can withstand a recession without a distribution cut.
A dividend stock to buy for immediate passive income
If you want an immediate passive income from next month and ensure the income doesn’t fall, consider buying CT REIT (TSX:CRT.UN). This trust has the backing of a strong retailer, Canadian Tire (TSX:CTC.A). It sells home improvement and sporting goods.
Canadian Tire’s stock fell after its second-quarter earnings missed the estimate due to a slowdown in discretionary spending. The retailer felt the pinch as inflation and high interest rates changed consumer spending patterns.
Things could worsen if household finances remain strained for a long time. Hence, the retailer has withdrawn its 2022-2025 financial targets and will focus on going with the market. It doesn’t mean earnings will fall. It only means that the market is unpredictable for the retailer to give targets.
The retailer’s stores across Canada are developed and managed by CT REIT. Canadian Tire pays rent for its stores to the REIT and includes it in expenses. This rent then goes to shareholders of the REIT in the form of distributions.
CT REIT is among the few commercial REITs that grow its distribution annually by over 3%. It is so because it never has to worry about the occupancy of new projects. In the worst-case scenario, Canadian Tire might pause its future new store openings. That might slow or pause CT REIT’s distribution growth. But it could continue paying a $0.88 distribution annually.
The 6% dividend yield with monthly payouts
The CT REIT is relatively new and has a distribution history of only 10 years (2013 to 2023). It means the stock has never experienced a recession except for the pandemic. Even during the pandemic, Canadian Tire saw a dip in sales, but it continued paying rent, and the REIT continued increasing distribution.
The overall weakness in the real estate sector has pulled down CT REIT’s stock price to a level where the yields have increased to 6%. However, the stock price is recovering with the market. Now is a good time to lock in 6% passive income. And as you buy the stock at its low, the chances of your invested amount falling are less.
If you invest over $2,000, you can buy 135 shares of CT REIT that pay $0.07485/month in distributions. The total passive income comes to $10.1 a month or $121 a year. If you buy the REIT stock today, you can start earning the $10 passive income from September 15 onwards.
