The Canadian REIT (real estate investment trust) scene looks like a great place to check out if you’re looking for steady passive income and a relative degree of stability. Indeed, the yields on various Canadian REITs are quite commanding, with many boasting well-covered payouts well north of 5% or even 6%. So much for the “4% rule!”
Of course, not all REITs are created equally. Some of the more pressured names with stretched payout ratios may be at greater risk of a distribution cut at some point down the road. And while capital gains aren’t as easy to come by with the higher-yielding REITs compared to their sub-4%-yielding counterparts and your average TSX stock, I find them to be a worthy place to stash a portion of one’s invested assets.
So, whether you’re a retired passive-income investor or a new, younger investor who just wants more diversification, an investment that goes beyond stocks, or an income supplement to stay ahead of inflation, the REIT market seems ripe for buying this summer.
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REIT valuations and yields are enticing. The retail REIT scene, in particular, looks promising
Valuations are still quite reasonable, even after a respectable year-to-date rally. As some of the faster-moving REITs attempt to revisit highs not seen in more than three years, perhaps now’s a good time to give the cohort another look before the Bank of Canada has a chance to cut interest rates again and give the entire REIT scene a bit of a much-needed jolt.
As we roll into mid-summer, the big question on the minds of prospective REIT investors is likely where the value is. Indeed, some of the more unloved corners of the REIT scene may offer better discounts and larger yields. Notably, the retail and office REIT scenes aren’t the most attractive places to put new money to work. But I think deep-value contrarians can stretch their investment dollar pretty far in such lesser-appreciated corners of the market.
CT REIT
CT REIT (TSX: CRT.UN) is one of my top picks for retail REITs this July. The REIT pulls in a vast majority (think in the ballpark of 90%) from the great Canadian retailer Canadian Tire (TSX: CTC.A). While I’m a fan of the retailer, I, like many other Canadian investors, would rather receive a higher yield by opting to invest in the real estate behind many of the Canadian icons’ locations. The yield currently sits at 5.97% while the beta sits at 0.85, about 15% lower than the beta of CTC.A shares (a lower figure means a lower correlation to the broader market). While the distribution isn’t as high as it used to be, it’s still bountiful, well-covered, and subject to growth.
Arguably, CT REIT is one of the most predictable distribution growth REITs out there, with a history of consistent distribution hikes and a still somewhat conservative adjusted funds from operations payout ratio that leaves room for further growth in the future.
CT REIT’s closeness with the great Canadian Tire, I think, makes it one of the most intriguing retail REITs to consider buying on recent strength. With big retrofitting projects looming and a remarkably long lease with Canadian Tire, CT REIT offers a level of distribution stability that’s tough to come by in the retail REIT sector these days.
