The scariest thing this Halloween is mortgages. Canadians are feeling the stress of rising mortgage payments, as some mortgages renew. A survey by Angus Reid Institute showed that more Canadians (8% in March to 15% in October) with a mortgage or rent feel their financial situation is “very difficult.”
Most Canadians are worried that mortgage renewals will significantly increase their monthly expense.
Having extra cash every month
Interest rates are not in your hands to control. But you can adjust your finances and be prepared for future monthly increases. While it is too late to substitute your upcoming mortgage renewal with passive income, it is a good time to prepare for the next crisis, maybe 10 or 15 years from now.
The high interest rate environment has reduced real estate stocks to their multi-year lows. While it might look like real estate investment trusts (REITs) will fail, they can be a value stock you have been looking for.
Imagine buying a prime property in the Greater Toronto Area, one of the most expensive cities in the world, at a 20-30% discount. The land is limited. Canada is among the top five best countries to live in, attracting millions of immigrants every year.
An economic recession could temporarily pull down real estate prices. But land has and will be an investment that appreciates in the long term. So, it is reasonable to believe that REIT share prices will appreciate as the economy recovers.
This 6% dividend stock that pays cash every month
RioCan REIT (TSX: REI.UN) is one of the largest retail REITs in Canada that owns 193 properties, of which 84 are in the Greater Toronto Area. The retail REIT has a diversified tenant base, with no single tenant accounting for more than 5% of rental income. It is diversifying its portfolio to include office and residential property.
RioCan is actively developing residential properties as immigrants prefer staying in larger cities. It is self-funding the development using its retained cash flow and the money earned from the sale of apartments. As the REIT brought the land at a low cost, it has the flexibility to delay new projects depending on its financial position.
RioCan has over $7.4 billion in total debt, of which $2.8 billion is mortgage. It has a high leverage ratio of 9.5, which means its total debt is 9.5 times its annual operating profit. The REIT aims to reduce this ratio to 8.0-9.0. It even slashed its distribution by 33% in 2020 to free up cash to fund development projects.
Today, RioCan pays out 59% of its funds from operations as distribution, which is lower than peers that pay 69-85%. Hence, its distribution yield is 6%. Look at RioCan’s slightly lower yield as a trade-off for lower risk.
Why invest in this 6% dividend stock now?
These are uncertain times. High mortgage payments, a slowing economy, and a recession in the making have made liquidity a priority for most companies. If the business is low, you would want your emergency funds to sustain longer till business picks up. RioCan is doing just that. It has maintained ample liquidity of $1.66 billion, adequate to pay off its two years of debt maturities.
With large parcels of land in the Greater Toronto Area, ample liquidity to cover debt payments, 97.4% occupancy, and a lower payout ratio, RioCan is well-placed to survive a recession and grow in an economic recovery. But you need to be patient with this stock as the next two to three years could be volatile, and the stock will most likely be in red.
But buying the dip will not only help you lock in a 6% yield but also give you a chance to grow your invested amount by more than 50%.
