The Bank of Canada is leading the charge to revive an economy burdened by high interest rates. The rate cut announcement brought respite to the real estate industry burdened with high leverage. Real estate needs significant initial capital and most REITs fund this capital requirement with debt. Thus, a rise in interest rates increased the interest expense of many dividend-paying REITs and falling property prices reduced the fair market value of their assets, putting downward pressure on the unit price.
A magnificent dividend stock down 14%
Slate Grocery REIT (TSX: SGR.UN) got caught up in the real estate slowdown and its unit price fell 14% in the last 12 months. I would like to give you a little background on real estate. Land is one asset whose value appreciates in the long term as land is limited. However, the land price also falls under certain circumstances like war or natural calamity that renders the land unfit for inhabitation.
Slate Grocery REIT owns 117 retail properties in America, mostly occupied by grocers and grocery-anchored stores. The high construction cost kept the availability of new stores low in the United States. When supply is limited, REITs have an edge to charge higher rent. Among retail landlords, Slate Grocery is charging lower rent than the market, giving it room to increase its lease value significantly. The REIT increased its lease by 10.8% in the first quarter.
Slate Grocery continued to get regular rent from its tenants keeping its operational cash flow stable. After deducting the interest expense, 80% of the funds from operations were used to pay distributions, hinting that the REIT has sufficient cash flow to manage interest and distributions.
However, the falling market value of properties pulled down the REIT’s unit price and increased its distribution yield to over 10%.
A dividend stock trading at a once-in-a-decade valuation
If you look past the short-term downturn in real estate, property prices will appreciate when interest rates fall and borrowing becomes more affordable. Slate Grocery REIT will recover the value it lost in the last two years and reward shareholders with capital appreciation. The unit is trading at 70% of its book value. It means you can get exposure to $1 worth of assets at $0.70. Such valuation comes once in a decade, an opportunity most value investors grab.
Slate Grocery REIT is at the dip, and when you buy at a cheaper valuation the risk of losing money falls. For a fundamentally strong stock like Slate Grocery, the chances of capital appreciation are higher.
What can a 10%+ yield do to your portfolio?
The rule of 72 tells you the time it takes for a return to double your money. A 10% annual return can double your money in over seven years after compounding. In compounding, you reinvest the returns and earn similar returns. This way the return earns more returns. However, Slate Grocery REIT has paused its Dividend Reinvestment Plan (DRIP). It means you will have to compound manually.
If you invest $5,000 in Slate Grocery REIT now when the unit price is below $11.20, you can buy 423 units that will pay you a little over $41 in monthly distributions. You can use this payout to buy high-growth and high-yield stocks and accelerate your compounding effect.
Bitfarms, BlackBerry, and Ballard Power Systems are high-growth stocks you could consider buying for $4 a share with your $40 distribution payout. Bitfarms can double or triple your money when Bitcoin prices rise in a strong economy. Even Blackberry stock could double your money once automotive demand recovers. These are opportunistic stocks good for active investing. Ballard Power Systems is a stock you might want to accumulate and hold for a decade.
The profits from the above high-growth stocks can be reinvested in dividend stocks like Timbercreek Financial, compounding your passive income. A $5,000 investment can help you diversify your portfolio and grow your returns.
