At a time when dividend stocks are altering their dividend policies, dividend growth stocks are slowing growth, and regular dividend payers are slashing dividends, a few stocks remain stable as a rock. The business and economic environment is changing, becoming competitive and capital-intensive. Canadian Tire is adapting to the change with its True North strategy.
One thing that sets Canadian Tire apart from other stores is Petro-Canada. You still have to visit the gas station to fuel up, and having a store right there has its perks. There are many home and living items you need to see in person before buying them. Canadian Tire caters to that need. From automotive accessories to outdoor living products, fitness/sports equipment, its sales are year-round. But this is not quite the dividend stock for monthly passive income.
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The dividend stock that could generate monthly passive income
Canadian Tire structured its business in such a way that it created a subsidiary for the real estate it acquires for its stores. Most retail and restaurant chains are actually real estate or finance businesses, from McDonald’s to Starbucks. Canadian Tire has also created a REIT out of its real estate business and has a finance business, too.
The REIT business trades individually on the TSX and is the dividend safe of the Canadian Tire ecosystem. CT REIT (TSX:CRT.UN) buys, develops, and intensifies stores for Canadian Tire in return for rent. No concerns around occupancy, marketing, or brokerage, and guaranteed rent. Since it is a REIT, it has to distribute most of its rent to unitholders, as the highest tax rate will apply for money retained in the trust. The trust structure makes it an ideal dividend stock for monthly passive income, as a major chunk of the monthly rent is passed on to unitholders.
Canadian Tire can deduct the rent it pays to its own subsidiary and reduce the taxable income. Since the REIT’s income is a fixed overhead of Canadian Tire, the rent is assured, and so are the dividends from the REIT. This whole system protects CT REIT’s dividend from business and macroeconomic pitfalls.
How owning 1,000 shares of this dividend stock could generate $79
CT REIT is currently offering $0.07903 per month in dividends. It will revise the rates in July by 2.5–3% as it increases rent for Canadian Tire by 1.5% annually. The additional dividend increase depends on the number of new stores opened or existing stores intensified that generate higher rent.
If you buy 1,000 units of CT REIT, the monthly payout will be $79. The unit is trading around $17.25, which means it will cost you $17,250 to earn $79 a month or $948.40 a year. But you can earn more than $79 if you give up on dividend income for a few years and let it compound.
How to convert $79 in monthly passive income to $116
CT REIT offers a dividend reinvestment plan (DRIP) wherein the $79 monthly dividend is reinvested to buy CT REIT units. The DRIP offers additional units equal to 3% of each reinvested distribution. It means you will get units worth $81.37 ($79 + $2.37 (3% of $79)). In a year, you will get DRIP units worth $976.85, which includes bonus units of $28.45.
Since the dividend per share will increase in July, we created a rough calculation of how DRIP units, 3% dividend growth, and 3% bonus units will increase your passive income from July onwards.
| Year(July to June) | DRIP Units Purchased @ $17.25 | Total CT REIT Units | CT REIT Dividend per Share (3% CAGR) | Annual Payout | Reinvested Amount (including 3% bonus) |
| Jul 26 to Jun 27 | 1000.00 | $0.977 | $976.811 | $1,006.12 | |
| Jul 27 to Jun 28 | 58.33 | 1058.33 | $1.006 | $1,064.797 | $1,096.74 |
| Jul 28 to Jun 29 | 63.58 | 1121.90 | $1.036 | $1,162.628 | $1,197.51 |
| Jul 29 to Jun 30 | 69.42 | 1191.33 | $1.067 | $1,271.606 | $1,309.75 |
| Jul 30 to Jun 31 | 75.93 | 1267.25 | $1.099 | $1,393.230 | $1,435.03 |
In five years, 1,000 units can earn 267.25 DRIP units that can generate additional dividend income of around $430.
We have compounded the dividend annually for ease of calculation. In reality, the compounding will happen monthly. Also, we assumed a constant unit price of $17.25, which will not be the case in the real world.
