If you need a big boost to your income but don’t want to have to put as much capital to get to your target by sticking with the 3-4% yielders, it might make sense to look for some of the market’s steadier, safer high-yielders. Of course, the risks may rise with every percentage point of yield you go after, but not all of the time.
In other instances, you might just get less growth, but there are rare cases of underappreciated names that might be in for multiple-driven upside as well as distribution (or dividend) growth to go with that fat yield. In this piece, we’ll jump right into the 7%-yielding real estate investment trust (REIT), SmartCentres REIT (TSX: SRU.UN), that might provide the income punch your Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) needs to give you that nice raise.
SmartCentres REIT has been my favourite Canadian REIT for some time, and not just because of the 7% yield. The relative discount on shares of the REIT, and often underestimated growth profile (long-term drivers of funds from operations), might be the bigger stars of the show.
Source: Getty Images
Look for a sustainable, rock-solid payout
The first and perhaps most obvious thing for income investors to look out for is whether or not that dividend (or distribution in the case of REITs) is on a healthy footing. Make sure that there’s enough wiggle room to deal with a sudden headwind or company-specific setback.
When it comes to SmartCentres REIT, the distribution is quite swollen, but the high occupancy rate, I think, is also incredibly hefty. But what happens when the economy runs on fumes, and occupancy rates look set to trend lower?
That’s the big question. The retail REITs might be exposed in the face of a particular nasty recession that causes more consumers to stay at home and put their wallets away, rather than going to the local mall to shop around for nice-to-haves. Though no REIT is immune to an economic downturn, I think SmartCentres has what it takes to be far more resilient, especially if budgeting becomes more difficult. Why? In my view, SmartCentres has one of the absolute best and most economically resilient tenants out there.
Look for traits of economic resilience
Nobody wants to be slapped with a huge dividend or distribution cut when times start getting tough, and the need for steady passive income to pay the bills is even higher. That’s why it’s not quite good enough to analyze the balance sheet to see how steady things are in the present. A bit of stress testing might be a good idea, especially for the high-yielders. Often, the dividends might be the first things to be chopped down once the headwinds of recession start rolling in and the results start to decay.
When it comes to SmartCentres, I’m not so worried about the chaos and occupancy rate downside that could hit on the way down, at least compared to other REITs.
Walmart is the top tenant, and it’s arguably a winner of business when times get tougher and inflation becomes wildly uncontrollable again. Leaning on a giant that has what it takes to win, as the industry treads water, makes me incredibly bullish on SmartCentres’s prospects.
Look for unique moat sources!
Of course, Walmart isn’t the only tenant, but it is one that draws crowds, which, as I’ve explained in prior pieces, enhances other tenants in the proximity. It seems that everything Walmart touches (or is close to) seems to turn into gold, especially in an inflationary environment. And while I’d love to buy shares of the retailer itself, they’re just too expensive at current levels. And, of course, that yield isn’t quite there. As such, I say, why not just buy the REIT that houses the Canadian locations instead?
It also helps that a majority of the rest of SmartCentres’s tenant base boasts robust fundamentals and the ability to not miss rent, even when the climate gets harsh. I think the REIT’s potent and resilient mix of tenants, with a concentration in Walmart, makes SmartCentres a force that most investors might be overlooking.
