So you have a Tax-Free Savings Account (TFSA) and want to start generating passive income. That means you’re likely looking into dividend stocks, with real estate investment trusts (REIT) some of the best options out there.
Yet before you dive into the highest dividend yield among REITs, it’s a great idea to look at which are essential. That’s why today we’re going to look at Slate Grocery REIT (TSX: SGR.UN), a top dividend stock that could potentially turn $20,000 into $200 each month!
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How to create that income
Right now, shares of SGR trade at about $14.50. So if you’re looking for passive income from $20,000, you might not get there quite yet from its 8.2% dividend yield. With $1.20 each year, or $0.10 a month, that would mean buying about 1,384 units. The distribution then would come to about $138 each month.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| SGR.UN | $14.45 | 1,384 | $1.20 | $1,661 | Monthly | $20,000 |
Now, you could up that investment to $34,680 to get there. However, before you dump in more cash, remember that passive income also comes from returns. So if shares were to climb just 3.7% you could still make up the difference of $739, hitting your goal of $200 each month. Together, you would gain $1,661 from dividend income and $739 in returns for $2,400 in annual income, or $200 per month.
But should you?
Again, don’t just take my word for it. Let’s instead look a little deeper to see if that investment is worth your time. Slate stock does seem to be built for long-term income, with 94% occupancy anchored by necessity-based grocery stores. These perform well even in downturns, underpinning cash flow far better than most retailers’.
What’s more, lease renewals climbed 13.8%, with new leases rising 28.8% above prior rents. This just goes to show that the upside is already being captured. Yet with units trading near book value – in fact just lower at 0.93 times book value – and net asset value at US$13.78, shares look like a steal.
Considerations
Now it’s not a perfect stock. The second quarter payout was 103% on adjusted funds from operations (AFFO). This means distributions exceeded true cash flow. While this could be manageable if temporary, it does raise a red flag if it persists.
Furthermore, the REIT has a higher beta at 1.2, so units can certainly swing more than larger, steadier REITs. Plus, occupancy did dip about 80 basis points to 94% year-over-year. While still healthy, further dips could put even more pressure on net operating income.
Bottom line
So yes, it is certainly possible to create passive income of $200 a month, and at least $138 from a $20,000 investment. Plus, Slate looks like a defensive grocery-anchored stock with a solid long-term foundation. Yet with AFFO above 100%, it’s not so much a “sleep easy” income stock. Still, if you’re comfortable with a higher yield REIT on the riskier side, Slate could be a stock that’s perfect for your TFSA.
