Canada is witnessing its highest prime interest rate in more than 15 years. This interest rate has impacted the profits of many dividend stocks with high debt. Many mid-cap stocks slashed their dividends, and office REITs paused their distributions until further notice. Thus, prices of many dividend stocks fell in the high-interest rate environment, creating a once-in-a-decade opportunity to lock in a less than 9% dividend yield.
The 9% dividend yield opportunity in real estate
The overall real estate market is seeing an uncertain business environment. Some segments are still undergoing a correction, and some are seeing a recovery. As borrowing has become expensive, homebuyers have postponed their plans, pulling down property prices. The fair market value of properties fell, hurting the profits of almost all REITs. But some locations, especially the Greater Toronto area, saw a surge in their rent driven by high demand from immigrants.
As the real estate market finds its footing, all stocks related to the sector are trading at a discount. Distributions remained unchanged while the stock price fell, inflating their dividend yield.
Two real-estate-related stocks are offering a distribution yield of more than 9%. If you have been considering real estate investments, you know that a property can only earn 3 to 5% of the property value as rent. A 9% yield is a lucrative investment opportunity. The high yield comes with a higher risk of a dividend cut. But the below stocks don’t show any signs of a dividend cut, making it a buy to boost your passive income portfolio.
Timbercreek Financial’s 9.5% dividend yield
Timbercreek Financial (TSX:TF) is a non-bank lender that gives short-duration loans to commercial real estate companies for development and other needs. It has lent $1.1 billion and is earning a weighted average interest rate of 9.9% in the September quarter.
The company earns from loan processing fees and the net interest on the loans. High-interest rates helped the lender charge a higher interest but reduced loan origination volume as many REITs paused their development projects until loans became affordable. Timbercreek Financial saw some of its borrowers delay their mortgage payments. However, the lender has a well-defined process to handle its credit risk. It is paying 85.6% of its cash flows as distribution, hinting that it can sustain its current monthly distribution of $0.0575 per share.
Once the Bank of Canada starts interest rate cuts, TF’s loan originations could increase. Higher loan processing revenue could help offset reduced interest income. It has secured a credit facility of $510 million, which it will use to give more loans, hinting at healthy growth in its loan portfolio.
The stock is trading at a 23% discount from the April 2022 level when the interest rate hike began. Now is a good time to buy the stock and lock in a 9.58% distribution yield.
Slate Grocery REIT’s 9.9% dividend yield
Like all REITs, Slate Grocery REIT (TSX:SGR.UN) saw a surge in interest expenses and a decline in net income as the fair market value of properties reduced. However, the REIT enjoys a resilient tenant base of grocers. Its occupancy rate was 94.7% as the United States faces constraints in new supply because of high construction costs and elevated interest rates.
As there are not many new constructions happening, the REIT has the scope to charge higher rent. That explains its 2023 lease spread of 10.4%. The REIT pays distributions in US dollars and converts that into Canadian dollars for Canadian investors. Thusly, the strengthening of the US dollar increases distributions. The REIT has a payout ratio of 81.1%, which is a comfortable level with a lower risk of distribution cuts.
The REIT’s unit price is trading at a 28.6% discount from its April 2022 levels, creating an opportunity to lock in a 9.9% yield.
Investing tip
However, I will not rule out the risk of a distribution cut. Even a dividend cut will keep the yield above 5%. And both stocks could ride the recovery rally when the real estate market revives.
