Housing continues to be one of the largest and most important sectors of the Canadian economy. That’s not a dynamic I can see changing anytime soon. Thus, real estate investment trusts (REITs) have become some of the most sought-after dividend stocks in the market, for good reason.
I think long-term investors can still gain exposure to certain REITs that are trading at reasonable valuations right now and sleep well at night. That’s really the key, given where valuations are today relative to where cash flows are headed over time.
Each of these three REITs is one I think has the asset quality and net income to support higher valuations (and greater dividends) over time.
Let’s dive in!
Source: Getty Images
Killam Apartment REIT
For investors looking for mixed-use and residential real estate, mostly in the form of apartments, Killam Apartment REIT (TSX: KMP.UN) continues to be one of my top picks on the TSX.
This company has continued to grow its portfolio, focusing on key markets which may be overlooked by other mega-cap companies. Killam has a particularly strong market share in Atlantic Canada, among other less-competitive regions. This allows for greater cash flow growth and pricing power over time, factors I think are often less considered than they should be when investing in this sector.
With a dividend yield of 4.1% and a price-to-earnings ratio under four times, this is a screaming buy right now, in my view.
Dream Industrial REIT
Industrial real estate is one segment of the alternative asset market, I think, that is relatively undervalued and overlooked. Within this sector, Dream Industrial REIT (TSX: DIR.UN) remains a top stock on my watch list right now.
Looking at the company’s stock chart above, it’s clearly been a volatile ride over the past year (and over the past five years for that matter). That said, with interest rates coming down, I’d suggest that industrial real estate is the segment of this sector that could perform the best, given how indebted many players are in this space.
With one of the highest debt loads in the sector, and a clearly beneficial backdrop as interest rates come down, Dream Industrial REIT remains one of my top picks for investors looking to put fresh capital to work in the real estate sector today.
SmartCentres REIT
Perhaps the most speculative name on this list, SmartCentres REIT (TSX: CSH.UN) is actually one of the REITs that has performed the best on this list. Its one-year return of roughly flat is better than the declines seen in many other parts of the economy, driven by interest rate instability and concerns around growth slowing.
A retail-focused REIT, SmartCentres operates a range of malls and other facilities, with blue-chip anchor clients that drive most of the company’s cash flow growth over the long term. In other words, a large U.S. or Canada-based retailer will take the vast majority of space in a new development, with other smaller to mid-sized companies taking the rest.
And given the foot traffic these anchor tenants provide, SmartCentres’s overall vacancy rate remains very low, with its cash flow growth profile remaining robust.
So long as this continues to be the case, I think the company’s 7% dividend yield looks very attractive (particularly given where Canadian bonds are trading right now).
