Interest Rate Alert: 2 REITs to Buy Before Interest Rates Finally Fall

REITs are a compelling choice when it comes to income-generating investments, even compared to safer and more consistent options like GICs.

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Rising interest rates have a multi-faceted impact on the economy. The most significant impact is on consumer behaviour, especially when it comes to discretionary spending. But it also affects investment behaviour. Some investment instruments and industries become more attractive than others. Guaranteed Investment Certificates, or GICs, become quite lucrative when interest rates rise, but the opposite is also true.

When interest rates start going down again, the appeal of GICs may start to fade, and though there are many ways to fill the income gap GICs may leave, good dividend stocks are perhaps the most practical solution. When it comes to dividend stocks in Canada, the right real estate investment trust, or REIT, stocks can be a healthy option.

An apartment REIT

Canadian Apartment Properties REIT (TSX:CAR.UN) is one of the largest REITs in Canada, both by market cap and by the value and size of its portfolio.

It manages over 64,500 residential suites, manufactured home sites, and townhouses, mostly in or around the major urban hubs in Canada and the Netherlands. This geographic diversification, even though it’s not very substantial in scale, comes with unique opportunities and more spread-out risk.

The REIT also boasts a solid occupancy rate of 98.4%, which endorses its efficiency as a landlord. As a stock, the REIT used to be popular more for its growth potential than its dividends. This makes sense considering the fact that despite its current discounted state, the 10-year price appreciation is over 120%. However, now that the stock has slumped, the yield has become slightly more intriguing at 3%.

Since it’s a well-established Aristocrat that has raised its payouts for 11 consecutive years, you can expect your income from this REIT to keep going up steadily. The payout ratio is in dangerous territory right now, but it historically remained (for most of the last decade) well below 50%. But once the REIT starts recovering and growing again, you will benefit from a powerful collective return potential.

A retail REIT

If you are looking for a REIT that leans more towards dividends than growth, SmartCentres REIT (TSX:SRU.UN) is an option worth considering.

It’s a fully integrated REIT with a sizable portfolio of retail properties, though it’s now expanding in the mixed-use space as well. It has 191 properties on its portfolio, and about 114 of them are anchored by Walmart, which is the REIT’s chief tenant and the crowning jewel of its tenant portfolio.

The REIT also boasts a strong occupancy of 98.5%. If we combine it with solid recovery numbers, this occupancy rate can be considered a good endorsement of the financial viability of this REIT’s dividends.

With a yield of about 7.4%, this is a far more attractive option from a dividend income perspective. The REIT has stopped raising its dividends, and it’s no longer an Aristocrat, but with its rock-solid payout ratios, it’s a healthy and safe high-yield dividend pick.

  • We just revealed five stocks as “best buys” this month … join Stock Advisor Canada to find out if SmartCentres REIT made the list!

Foolish takeaway

Both REITs are currently in a bear market phase, which has resulted in slightly outsized yields compared to their historical numbers. But once the real estate market bounces back and the REITs start recovering, you may also experience decent capital appreciation as well, which would be a bonus.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends SmartCentres Real Estate Investment Trust and Walmart. The Motley Fool has a disclosure policy.

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