Are you nearing your retirement and in the process of converting some of your wealth into a pension? Then, don’t just rely on fixed-income securities. Diversify your wealth across multiple passive-income sources. When you think about earning without working, what options come to mind? Landlords, money lenders, and investors — each has its pros and cons. But you can take the pros of two, combine them, and build yourself different income sources.
How to earn passive income from TSX
As a landlord, you might have to shell out money for legal work, property tax, maintenance, and other charges. There is also the risk of your property remaining vacant. Moreover, it isn’t easy to buy or sell a property. You can skip all this and get exposure to rental passive income for less than $12 per unit and with the liquidity of a stock.
The TSX stock exchange offers several passive income sources, from real estate investment trusts (REITs) to dividend stocks to dividend exchange-traded funds. Slate Grocery REIT (TSX: SGR.UN) is a landlord for 117 properties in the United States. Its tenants are grocers and grocery-anchored stores. And it has the advantage of limited construction in the United States.
Its top two tenants, Kroger and Walmart, account for 18.6% of its gross leasable area, creating a well-diversified portfolio of tenants. Since it earns rent in U.S. dollars, it also pays distributions to its unitholders in U.S. dollars. However, Canadian unitholders get the payouts in Canadian dollars, benefiting from the exchange rate.
Its distributions are relatively stable compared to other REITs, as grocers are sticky tenants. While the REIT saw a 10.4% increase in rental spread, it did not increase its distributions to maintain some flexibility. Its payout ratio increased to 81.1% in December 2023 from 78.8% a year ago as the fair market value of properties continued to fall.
Slate Grocery REIT has a high retention ratio of 94.7%, as grocers and grocery-anchored stores are sticky. Hence, the REIT is a good stock to earn a monthly passive income.
How to earn $500 in passive income with this TSX stock
Slate Grocery REIT offers an annual dividend of $1.159 per unit, a 10.88% yield amid the current unit price of $10.86. If you buy 5,177 units of this REIT today for $10.86 per unit, you can get $513 in passive income from next month onwards. However, you may have to shell out $56,378 to buy these units.
Even though the REIT does not grow its distributions, it offers the exchange rate volatility as it pays U.S. dollar dividends in the Canadian dollar.
Now is an opportune time to buy the Slate Grocery REIT as the unit trades at a 14.6% discount from its February high of $12.89. The U.S. Fed has kept interest rates unchanged, and the March inflation number of 3.5% has put downward pressure on several stocks.
Opportunity for capital appreciation
Slate Grocery REIT’s stock price reflects the value of its property portfolio. High interest rates negatively affect property prices as mortgages become expensive. Even Slate Grocery REIT saw a decline in the fair market value of the property. However, the company has no plans to sell the properties. Once interest rates fall, the real estate market will recover, driving demand. That could help the Slate Grocery REIT unit price return to its average of around $13.5, representing a 24% upside.
Consider investing in the Slate Grocery REIT through your Tax-Free Savings Account (TFSA), as you can use the $500 distribution to buy different stocks every month. While the TFSA contribution room is $7,000 in 2024, you could invest $13,000 through TFSA after including the $6,000 distribution. This will help you compound your returns tax-free.
