Real estate investment trusts, or REITs, are among the few market segments Canadian investors look into when seeking high yields. They also offer their dividends every month, and investors seeking this frequency might have another reason to evaluate different REIT stocks as potential investments.
However, the high yields of most REITs should be assessed with caution, as they may stem from a rapid stock decline, indicating one or more problems underlying the business itself.
One high-yield REIT that Canadians might consider looking into is Slate Grocery REIT (TSX:SGR.UN).
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The REIT
The first thing you must know about this Canadian REIT is that its property portfolio is U.S.-based. As the name suggests, 100% of its properties/real estate assets are anchored by grocery businesses. The REIT controls a portfolio of about 117 properties across 24 U.S. states worth around $2.4 billion.
The tenant portfolio is equally impressive, with giants like Walmart, Kroger, and Albertsons making up over 22% of the total tenant portfolio. This enhances the stability of the grocery-focused business model and portfolio of the REIT.
The grocery business is evergreen and capable of surviving various economic challenges that might severely impact overall consumer behaviour (for most other companies). However, since food is a basic necessity, these businesses manage to maintain relatively healthy sales numbers, even during economic downturns.
The dividends
Slate Grocery is offering a very generous yield right now, even for a REIT. The 10% yield can help you generate $100 monthly passive income with just $12,000 capital. One main reason behind this beefed-up yield is the 32% decline the stock has experienced in the last couple of years (from its post-pandemic peak).
The stock quickly recovered after the 2020 market crash and reached its pre-pandemic levels in roughly one and a half years. After reaching its peak in 2022, it continued climbing and started to slump, and it has yet to recover from this.
This is another reason to consider this stock, as it reflects the potential for untapped capital appreciation that might manifest in the coming years.
Now, the question is of dividend sustainability. While not a good metric for REITs, the payout ratio has been dangerously high for most years in the past decade. But the REIT has managed to sustain its payouts so far.
Its rental revenue grew in the last quarter, and the funds from operations (FFO) payout ratio, which is far more relevant for REITs, has been healthy for the past several quarters.
Foolish takeaway
Considering its safe focus and portfolio (grocery-anchored properties), dividend history, and safe FFO payout ratios, it would be reasonable to assume that the dividends are secure despite the high yield. The REIT managed to sustain its payouts during the last market crash, so it might also survive the upcoming one.
