As interest rates begin to nosedive, the setup looks good for new passive-income investors seeking to lock in a swollen dividend yield alongside a good shot at capital gains. Indeed, the momentum enjoyed by the broad range of REITs (real estate investment trusts) has been quite notable in recent months.
Of course, the Bank of Canada’s latest rate cuts have likely been baked into the rally already. That said, if you’re enticed by the slate of yields you see today and have extra cash to put to work in cash flow machines, I’d argue that it’s still a fantastic time to pick up a few shares of a well-run REIT.
Image source: Getty Images
Too hot to handle? Here’s how I’d buy REITs on the way up
Even after the recent broad REIT rally, I still find valuations to be a tad on the conservative side. Though I wouldn’t put down too sizeable a sum after a double-digit percentage rally in just a few weeks, I think it makes plenty of sense to dollar-cost average (DCA) into some heated REITs on the way up.
Undoubtedly, the DCA strategy works quite well for new investors looking to buy dips or crashes in those “falling knife” types of stocks. Similarly, I think DCA may make sense for hot stocks that only seem to march higher. A pullback is never too far away. And though they can be tough to time, the best action plan may be to buy a bit today with the hope of adding to a position on a pullback. Of course, there’s always a risk that a rally can run on without a correction for a considerable amount of time.
Given the damage that’s already been done to REITs (think the rate hike-driven selloff of 2022), a blistering rally that extends well into next year would not at all be out of the ordinary. In fact, I think such a rally would be necessary if valuations are to better reflect the magnitude of rate reductions to come.
Canadian Apartment Properties REIT
Canadian Apartment Properties REIT (TSX: CAR.UN) has been on an incredible run, up around 28% since the start of June. Lower rates could undoubtedly be a huge boon for the high-growth residential REIT. While the rally has shown signs of stalling out in the past two weeks, I still think CAPREIT stock’s run is far from over.
The REIT has been selling off non-core assets of late. As new residential projects come to be, I’d not be shocked if the distribution (currently yielding 2.69%) grows at an above-average rate in this coming lower-rate world. If you seek a best-in-breed residential REIT with exposure to some of the hottest rental markets (the Greater Vancouver and Toronto Areas) in the country, look no further than the name. I still think it’s cheap, with ample room to run as prior all-time highs just shy of $63 per share return to within striking distance.
CAPREIT’s rate sensitivity has worked against it for too long. Though its balance sheet looks in far better shape than most other REITs, the tailwind of lower rates may help CAPREIT put its foot down on the accelerator a bit more.
As the tides finally turn in their favour with every Bank of Canada rate cut, look for shares to deliver the perfect mix of passive income and growth.
