Launched in 2009, the TFSA (Tax-Free Savings Account) is a highly popular account among Canadians, as it allows you to hold qualified investments across various asset classes.
Given the tax-sheltered status of the TFSA, it makes sense to hold quality dividend stocks in this registered account. In addition to a steady stream of dividend income, the best dividend stocks generate additional returns via long-term capital gains, both of which are exempt from taxes if held in the TFSA.
One small-cap TSX stock offering a dividend yield of 8.2% is Nexus Industrial REIT (TSX:NXR.UN). Nexus is a Canadian real estate investment trust (REIT) specializing in acquiring and managing industrial properties across primary and secondary markets. The REIT owns 86 properties totalling 12.6 million square feet of leasable space and is valued at a market cap of $555 million.
The REIT has an annual dividend payout of $0.64 per share, which translates to a forward yield of 8.2%.
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Is this dividend stock a good buy right now?
Nexus Industrial REIT delivered a strong second quarter as a newly minted pure-play Canadian industrial landlord, achieving net operating income (NOI) growth of 1.7% to $32.2 million despite offloading 33 properties over the past year.
Nexus sold off its office and retail portfolios along with some non-core industrial buildings, yet managed to grow earnings through aggressive leasing, profitable development projects, and strategic property acquisitions. CEO Kelly Hanczyk emphasized that this achievement showcases the quality of the operating portfolio and execution capabilities.
The REIT’s leasing momentum remained robust, with nearly 400,000 square feet of new deals and renewals completed during the quarter, resulting in an impressive 38% rent increase.
This strong mark-to-market drove industrial same-property NOI growth of 2.8% for the quarter and 4.3% for the first half, keeping Nexus on track for mid-single-digit growth for the full year. The company has already leased over 90% of the approximately 1.7 million square feet set to expire in 2025, with discussions underway on the remaining space.
A major win occurred in London, Ontario, where Nexus quickly backfilled a 223,000-square-foot building vacated by Peavey Mart after the retailer entered creditor protection in April.
The REIT signed a 15-year lease with one of Canada’s largest construction services firms, with the tenant investing $8 million to $10 million in improvements.
The deal starts at $3 per square foot during a six-month fixturing period, then rises to $7 per square foot in January, with annual increases of $1 until 2031. However, a second Peavey location in Red Deer remains unleased and is being marketed for both lease and sale.
Development activity continued to advance, with two projects nearing completion in August. A 115,000-square-foot small-bay industrial building in Calgary is ahead of schedule, with eight of nine units already committed, and is expected to deliver an 11% unlevered return on a $15 million investment.
A larger 345,000-square-foot project in St. Thomas will transition from earning 7.8% on costs to a full 9% yield on $55 million in development spending upon substantial completion.
Nexus announced two additional projects starting later this year, which include the expansion of its Richmond property by 52,000 square feet.
Normalized funds from operations (FFO) rose 6% to $0.188 per unit while adjusted funds from operations climbed 7% to $0.159 per unit, driven by lower interest costs and higher NOI.
Is the REIT undervalued?
Analysts tracking Nexus Industrial forecast adjusted FFO per share to expand from $0.62 per share in 2024 to $0.72 per share in 2027. This will improve the dividend payout ratio from over 100% to 88%.
Analysts tracking Nexus Industrial REIT forecast the stock to gain 7%, given consensus price targets. If we adjust for dividends, cumulative returns could be closer to 15% over the next 12 months.
In the last 10 years, the Canadian REIT has returned more than 150% to shareholders in dividend-adjusted returns.
