There is often a debate around dividend stocks. Is high yield better than dividend growth? The high yield comes with high risk. If there is no incentive nobody will take risks. I took two stocks that give monthly payouts to test the high yield versus dividend growth logic. Each of them has their place in your portfolio. Let’s see how.
Slate Grocery REIT vs. CT REIT
Here are two REITs, both catering to the retail space and paying monthly distributions.
Slate Grocery REIT (TSX:SGR.UN) has a higher dividend yield but stagnant payouts. Its five-year average yield is 9.2% but the real estate weakness has pulled down the unit price and inflated the yield to 10.6%.
The REIT pays dividends in US dollars and Canadians get the benefit of an exchange rate that helps them get a higher dividend every year. However, 2021 was a year when its dividend per share fell due to forex losses. The REIT’s rent is resilient as its tenants are mainly grocers and grocery-anchored stores. Moreover, it maintains a strong payout ratio of 80% of its funds from operations, which gives it the flexibility to maintain its dividend even in difficult times.
CT REIT (TSX:CRT.UN) also has a resilient business model since it has an agreement with its parent Canadian Tire. The agreement gives it the first right to buy the land where Canadian Tire stores are located. CT REIT buys Canadian Tire retail stores owned by the retailer and the third party. It enjoys 99%-plus occupancy, with 90% occupied by the retailer itself. It increases cash flow by increasing rent by 1.5% annually, developing and acquiring more stores. The REIT passes on the higher rent by increasing its payouts by 3% annually in July.
CT REIT has a five-year average dividend yield of 5.4% and offers a dividend reinvestment plan (DRIP), which Slate Grocery REIT doesn’t.
Which high-yield dividend stock is better?
While both the REITs have a resilient business model, which gives you a higher dollar value – higher-yield Slate Grocery REIT or dividend-grower CT REIT?
Let’s try to test the investment with historical data. I assumed a $10,000 investment in both the REITs on January 1, 2015. A $10,000 investment could have bought you 816 units of Slate Grocery REIT giving you an annual dividend income of $800 in 12 monthly installments. Since we did not take a DRIP in Slate Grocery, the dollar rate fluctuation would increase your payout to $945.70 on 816 units in 2023.
| Year | Slate Grocery REIT Annual Dividend Per Unit | Dividend Income | CT REIT Annual Dividend Per Unit | Dividend Income | Stock Price on 1st day of Year | DRIP Shares | Total shares |
| 2023 | $1.159 | $945.74 | 0.8982 | $1,077.28 | $14.61 | 66.20 | 1199.4 |
| 2022 | $1.122 | $915.52 | $0.854 | $967.23 | $15.65 | 56.50 | 1133.2 |
| 2021 | $1.073 | $875.74 | $0.821 | $884.18 | $17.16 | 47.54 | 1076.7 |
| 2020 | $1.149 | $937.81 | $0.793 | $815.77 | $15.70 | 47.35 | 1029.1 |
| 2019 | $1.130 | $921.75 | $0.757 | $743.41 | $16.14 | 42.37 | 981.8 |
| 2018 | $1.086 | $886.54 | $0.728 | $683.93 | $11.56 | 53.63 | 939.4 |
| 2017 | $1.048 | $855.17 | $0.700 | $620.01 | $14.49 | 39.71 | 885.8 |
| 2016 | $1.029 | $839.42 | $0.680 | $575.36 | $14.89 | 36.07 | 846.1 |
| 2015 | $0.980 | $800.01 | $0.663 | $537.03 | $12.81 | 0 | 810 |
| Total | $7,977.70 | $6,904.19 |
A $10,000 investment in CT REIT would have bought you 810 units and given you an annual dividend income of $537. Note the wide income gap between the two REITs. However, CT REIT beats Slate Grocery’s high yield in seven years using the power of compounding.
The DRIP plan buys more units of CT REIT with the $537 dividend income. Next year, you get a dividend on 846 units. Your dividend income increases and so do your units. Whereas, the unit count remains the same in Slate Grocery REIT. After 2021, the gap in dividend income widens but this time in favour of CT REIT.
Key takeaway
If you are near retirement and want your money to start generating passive income, a high-yield dividend stock is a better option as you need the payout now. If you have 10-plus years to retire and can go without passive income, a DRIP is a better option. Which stock is better depends on what you want.
