If you’re searching for a reliable monthly dividend payer within the Canadian stock market, your search will likely lead you to a real estate investment trust (REIT).
A REIT is essentially a company that owns, operates, or finances income-generating real estate. The rental income generated from these properties is passed along to shareholders in the form of dividends.
While REITs aren’t the most tax-efficient vehicles due to their distribution composition, placing them in a Tax-Free Savings Account (TFSA) can mitigate this issue, making them an attractive option for tax-free income.
However, it’s crucial to understand that not all REITs are created equal. While many offer high dividend yields, the quality of these dividends can vary significantly.
Today, I’ll go over what makes a REIT’s dividends reliable and introduce you to one with a 5.5% yield that pays out monthly.
Source: Getty Images
Analyzing REIT dividend quality
When evaluating REITs, it’s crucial to look beyond the surface-level dividend yield and consider the sources and sustainability of these dividends.
Firstly, occupancy rate is key. Since REIT dividends are predominantly derived from rental income, a high occupancy rate is vital for maintaining stable dividends. An occupancy rate of 95% or above is generally seen as robust, indicating that most of the REIT’s properties are generating income consistently.
Unlike typical corporations that report earnings per share, REITs focus on adjusted funds from operations (AFFO). This is a crucial metric for assessing a REIT’s financial health and its ability to sustain or grow dividends.
AFFO is a measure of the trust’s ongoing earnings from its rental properties, adjusted for certain costs like property improvements and maintenance. Ideally, you’d want to see an upward trend in AFFO per share over time.
Debt levels are also a critical aspect to consider. All real estate involves some leverage, but sustainable debt management is essential. A debt-to-asset ratio below 50% is generally considered prudent.
The quality of a REIT’s tenants is another significant factor. Tenants that operate in less cyclical industries, such as grocery stores and storage facilities, provide more stable rental income streams. In contrast, sectors like commercial real estate, especially office spaces, can be more volatile, as seen during downturns.
Lastly, the presence of an anchor tenant needs careful consideration. While they can provide stability and reliability to the income stream, over-reliance on a single, large tenant can pose risks if that tenant faces financial difficulties. Ensure that any anchor tenants have a solid credit rating and are durable.
My favourite REIT
I have a soft spot for Choice Properties REIT (TSX:CHP.UN), and it aligns well with the criteria I laid out earlier.
Here are some quick highlights for you to look closer into:
- Debt-to-assets ratio: Choice Properties maintains a healthy balance with a debt-to-assets ratio of 38.2%, which is well below the 50% threshold.
- Occupancy rate: With an occupancy rate of 97.7%, this REIT demonstrates its ability to keep its properties leased, ensuring a steady income stream.
- Anchor tenant: 64.5% is tied to one anchor tenant—Loblaw. While a large anchor tenant might be a concern, Loblaw’s is as solid as it gets.
Currently, Choice Properties offers a dividend yield of 5.5% at $0.76 per share, with dividends paid monthly. The ex-dividend date is typically at the end of each month.
However, it’s not without its drawbacks. The dividend growth has been modest, with an annualized increase of just 0.76% over the last five years. The dividend-paying streak is relatively short at eight years without a cut or increase.
Additionally, it is trading at a 16.4% price-to-AFFO ratio compared to the sector average of 12.5%, which suggests it may be slightly overvalued. AFFO per share has seen a slow growth rate of 1% annually over the past five years.
