There is growing tension in the TSX as the Bank of Canada announces interest rate this week. Economists have mixed opinions, with a 60% probability of a rate cut. However, a few believe the bank might delay the rate cut. The uncertainty around rate cuts has been pulling down the price of interest rate-sensitive stocks like real estate, lenders, banks, and companies with significant debt (like telecoms and pipelines). The overall macro uncertainty has even pulled down the price of this dividend stock, increasing the yield to 10.88%.
This dividend stock trading at an attractive value
Slate Grocery REIT (TSX: SGR.UN) stock is down 14% since January, even though its fundamentals show otherwise. The real estate investment trust (REIT) has 117 retail properties in the United States. Its strength is most of its tenants are grocers and grocery-anchored stores. High interest rates and construction costs have kept new retail store supply low, allowing the REIT to charge higher rent.
Slate Grocery REIT leased 770,000 square feet in the first quarter, with new leases signed at 31% above average rent and non-option renewals at 15% above expiring rents. For a landlord, a higher lease means more rent. Higher occupancy means regular rental income, and grocers are sticky tenants. The REIT is at a sweet spot, earning higher rent without impacting its occupancy. Despite a 10.8% leasing spread, it charged lower rent than others in the United States, which gives it room to increase rent.
This 10.88% dividend stock pays cash every month
Slate Grocery REIT has a healthy cash flow and pays 80% of its funds from operations as monthly distributions to unitholders. As the REIT earns rent in U.S. dollars, it also pays a fixed US$0.072 dividend per share in a month. However, Canadian investors get the distribution in Canadian dollars, benefitting from the foreign exchange rate.
The table below shows how the Canadian dollar conversion increased the REIT’s annual distribution by an average of 3%.
| Year | Slate Grocery REIT Annual Dividend Per Unit | Increase |
| 2023 | $1.159 | 3% |
| 2022 | $1.122 | 5% |
| 2021 | $1.073 | -7% |
| 2020 | $1.149 | 2% |
| 2019 | $1.130 | 4% |
| 2018 | $1.086 | 4% |
| 2017 | $1.048 | 2% |
| 2016 | $1.029 | 5% |
| 2015 | $0.980 |
The REIT has suspended its dividend-reinvestment plan, which means you will get cash every month. The current dip has increased the yield to 10.88%.
How to invest in Slate Grocery REIT
Slate Grocery REIT is a dividend stock and doesn’t give capital appreciation. However, weak macroeconomic conditions have reduced the stock price. Any announcement around interest rate cut could drive the stock price up and return it to its average trading price of $13, representing a 21% upside.
Now is a good time to invest a lump sum in the REIT and keep accumulating more units until the unit price rebounds to $11.5 and above. Its distributions are secure as it caters to a tenant base resilient to economic conditions. A $10,000 investment today can buy you 929 units of Slate Grocery REIT and give you $90.3 every month. You can use this to hedge against foreign exchange risk if you frequently travel to the United States.
You can consider adding it to your retirement portfolio as it can give you the diversification of a new asset class and hedge your portfolio against foreign exchange risk.
However, do not invest a significant chunk of your portfolio in this REIT as it doesn’t give you inflation-hedged distributions or capital appreciation. Consider adding a growth stock like Constellation Software to your core portfolio for double-digit growth. As for inflation-adjusted dividends, you have Enbridge and Telus for your core portfolio.
