While it is true that you should not put all your eggs in one basket, a slight concentration risk is worth a shot when returns are assured. There is a monthly passive-income payer that is at an advantage in the current scenario. You can consider investing your $7,000 Tax-Free Savings Account contribution for 2025 in it.
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This monthly passive-income payer is an attractive investment
In the investment world, one event has different implications for different segments depending on how money changes hands. Understanding the flow of money in response to a particular event can give you an early mover advantage. You can move your investments with the money flow.
Let’s take the example of interest rates.
When the Bank of Canada increased interest rates in 2022, risk-averse investors parked their money in fixed-income securities and bank deposits to enjoy higher interest at lower risk. With interest rate cuts in 2024, these instruments were no longer attractive.
So, where is the money moving next?
The rate cuts are benefiting the consumer and real estate sectors by making borrowing affordable. The recent earnings of Royal Bank of Canada show a moderate growth in mortgage loans, especially in the Greater Toronto Area, but a strong uptick in consumer and credit card loans. This means the retail sector is reviving, while the real estate sector is cautious with capital spending. This reflects in stock prices as Loblaw and Canadian Tire stocks rise to new highs.
For investors, retail real estate investment trusts (REITs) are a good opportunity right now, as the money will flow to them later. Here’s how. Higher sales from consumer spending recovery will pass money to retailers, which they will use to build more stores, passing the money to REITs through rental income.
Note that the Greater Toronto Area is seeing a slowdown in real estate sales, which means the fair market value of properties may fall. Hence, retail REITs with exposure across Canada are at an advantage over those concentrated in the Greater Toronto Area.
CT REIT (TSX: CRT.UN) is well-placed to benefit in the current environment.
Why am I confident about this monthly passive-income payer?
CT REIT is a Canadian Tire subsidiary, which means it gets the first right to buy, develop, and lease a store to the retailer. Canadian Tire has stores across Canada. It offers a wide variety of goods from automotive to living, outdoor, and sports, which helps it enjoy strong sales all year round. The company has adopted the True North strategy, which involves opening new stores and developing some existing ones.
Canadian Tire’s higher operating expense in the second quarter showed its investment in True North. This money is flowing to CT REIT, which will help it earn higher rent from new stores and grow its distributions. CT REIT currently has 20 projects at various stages, which require $433 million in investment. The majority of these projects are expected to be completed over the next two years.
This brings us to the question: Does CT REIT have the money to develop these stores?
Unlike other REITs that take construction loans and mortgages to finance new store development, CT REIT uses debentures and internal accruals. If a new store generates a 7.5% rental yield, the REIT issues a 4.5% yield debenture.
Other REITs don’t use debentures as extensively as CT REIT because they face the risk of property remaining vacant. CT REIT doesn’t have to worry about occupancy, as the parent occupies over 90% of its leased area. This advantage makes the REIT an attractive monthly passive-income payer.
Why should you buy CT REIT stock now?
With every new property, rental income increases, which it passes on to unitholders by growing dividends at an average annual rate of 3%. It maintains a payout ratio at or below 75% of funds from operations. In the second quarter, its payout ratio was 72.2% as some funds were directed towards new developments.
The REIT’s unit price is influenced by the fair market value of its properties. The new projects will increase its property portfolio value in the next few years and drive the unit price.
