The prospects for falling interest rates are increasing in North America. The Bank of Canada has already cut its benchmark rates twice so far this year, and rate-sensitive assets, especially leveraged real estate, could significantly recover over the coming years. Income-oriented investors could buy beaten-down Real Estate Investment Trusts (REITs) before their full recovery and lock into some lucrative monthly passive income streams – potentially for a lifetime.
REITs distribute almost all of their earned rental income to investors every year. If worried about individual asset risks, dividend-paying exchange-traded funds (ETFs) could offer wide diversification in one single investment. The BMO Equal Weight REITs Index ETF (TSX: ZRE) has gained 6% in value over the past month as prospects for lower interest rates increased (and triggered volatility spikes).
REITs should do better in a lower interest rate environment as borrowing costs decline. Some might even raise distributions.
Here’s why I’m bullish on the ZRE ETF as a reliable source of reliable monthly dividends.
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BMO Equal Weight REITs Index ETF (ZRE)
Investors looking for a regular source of dependable monthly income streams should check out the BMO Equal Weight REITs Index ETF, an exchange-traded fund managed by the learned professionals at the Bank of Montreal (TSX: BMO). Launched in 2010, the ETF provides investors access to a diversified portfolio of 21 Canadian Real Estate Investment Trusts (REITs) that pay boatloads of cash in monthly income distributions from rentals generated on various commercial properties.
Why should you invest in the ZRE ETF for passive income? The ZRE ETF allocates equal amounts from its $551 million in capital to each Canadian REIT in the Solactive Equal Weight Canadian REIT Index. An equal weighting (at about 5%) on each holding significantly reduces excessive exposure to any single REIT holding in the portfolio and dilutes any risks of distribution cuts to income investors.
The ETF limits risks posed by any single poor-performing REIT to the portfolio. This earns it a medium-risk rating. Investors can sleep well at night knowing that any acquisition or distribution cut on one portfolio holding won’t significantly impact their future monthly paycheques. For its troubles, BMO cheaply prices its management fee and the ETF has a management expense ratio (MER) of 0.61%. Investors may pay as little as $0.61 annually on every $1,000 invested.
The BMO Equal Weight REITs Index ETF pays $0.09 per unit in monthly dividends. The dividends should yield a lucrative 5.1% annually.
Since its inception in 2010, the ZRE ETF has averaged a respectable 7.7% average annual return to investors. It could do better as the Bank of Canada starts lowering rates again.
Alternative dividend ETF to buy for monthly income
An alternative to the ZRE ETF could be the much older iShares S&P/TSX Capped REIT Index ETF (TSX: XRE), which launched in 2002. It has double the assets under management at $1.2 billion invested in fewer (16) holdings. However, the XRE ETF’s dividend yield of 4.6% is inferior to ZRE’s 5.1%, so you may need more capital to earn $500 a month. Further, the XRE has higher risk exposures as it allows individual REIT weights to increase up to 25% of assets. The XRE has marginally underperformed the ZRE over several historical holding periods.
How much to invest to earn $500 in monthly dividends
To get $500 a month in dividends, an investor could allocate about $117,200 to the ZRE ETF and earn about $500 in dividends every month. The XRE requires more capital to earn a similar return. The table below shows details of the potential trades.
| Investment Asset | Recent Price | Number of Shares | Investment Amount | Dividend Rate | Total Dividend | Frequency | Total Annual Income |
| BMO Equal Weight REITs Index ETF (TSX: ZRE) | $21.08 | 5,556 | $117,120.48 | $0.09 | $500.04 | Monthly | $6,000.48 |
| iShares S&P/TSX Capped REIT Index ETF (TSX: XRE) | $15.73 | 8,334 | $131,093.82 | $0.06 | $500.04 | Monthly | $6,000.48 |
The ZRE ETF is an eligible investment to add to your registered tax-advantaged accounts, including the Tax-Free Savings Account (TFSA).
Investors should note that the ZRE ETF offers exposure to one asset class: REITs. To enhance diversification, deploy capital across several asset classes, including individual stocks, bonds, guaranteed investment certificates (GICs), and preferred equities, among other options, to balance out portfolio risks and returns across a wider investment universe.
