Increasing market chatter regarding the growing chances of interest rate stability or potential rate cuts for late 2024 has been favourable to stock markets in December. The TSX gained close to 4% during the past month. However, the good news that lifts asset prices also reduces the bloated dividend yields once available for income-oriented investors. High yields on top Canadian dividend stocks could soon go away – fast.
As an example, SmartCentres Real Estate Investment Trust’s (TSX:SRU.UN) units have gained more than 9% in value this month, and the distribution yield, which sat at 8% going into December, is shrinking fast. The Canadian Real Estate Investment Trust (REIT) pays distributions to stock investors every month, yielding 7.5% annually at today’s unit prices.
Investors who desire to earn some recurring, dependable regular income from their savings and investment portfolios may wish to deploy capital into income-producing assets like SmartCentres REIT before yields go away. Canadian REITs is one of the top asset classes to consider for monthly passive income, and the whole bunch saw distribution yields rise in 2022 as publicly traded real estate assets took heavy beatings as interest rates rose.
Stable to declining interest rates could be favourable to REITs. They employ significant leverage, and stable to lower interest rates imply stable financing costs, and stable to lower discount rates on property valuations.
Buy SmartCentres REIT stock before the 7.5% yield goes away
SmartCentres REIT is a founder-led Canadian retail property trust that could richly reward its equity investors through capital gains and juicy distribution yields over the coming five years.
The trust holds a portfolio of 171 income-producing properties, and 20 projects under development, all representing 35 million square feet of gross leasable area. The (predominantly) Walmart-anchored portfolio performed exceptionally well during COVID-19 lockdowns as open-air shopping malls provided better conditions for pandemic containment. SmartCentres REIT could do better as its $16 billion ongoing mixed-use development program enhances traffic, enhancing the potential for higher rental income per square foot on existing properties.
The REIT has done well for its investors in 2023. Portfolio occupancy levels increased by 50 basis points to 98.5% during the first nine months of the year. By the end of September, management had renewed 84.2% of the year’s expiring leases at rental rates 8.4% higher (excluding rates for anchors). Demand for commercial space at the REIT’s properties remains strong, and rates could go higher if mixed-use developments continue to turn properties into high-traffic “city centres.”
Most noteworthy, the real estate business became more profitable in 2023. SmartCentres REIT’s same property net operating income for the first nine months of 2023 grew 3.2% year over year to $398 million. Sustained organic income growth on existing properties makes them more valuable and provides better coverage to the trust’s distribution.
SmartCentres REIT paid out 94.3% of its Adjusted Funds From Operations (AFFO) for the first three quarters of 2023, an improvement from 99.6% during the same period last year. The distribution looks safely covered by recurring cash flow.
The juicy distribution yield on SmartCentres REIT stock could shrink in 2024 if rates soften, and if the trust profitably closes on four large self-storage developments as anticipated next year.