This Dividend Stock Has Quietly Turned Into a Value Play for Passive Income Seekers

Not only does this ultra-defensive dividend stock offer a yield of 4.2%, but it’s also trading at nearly its lowest level in over a decade.

Daniel Da Costa

Daniel joined the Motley Fool Canada team in 2019 with years of experience in banking and investing. Growing up the son of a proprietary stock trader and educator, Daniel’s always found joy in helping Canadians to improve their financial situations. With the Motley Fool, Daniel sees an even more rewarding way to impact Canadians positively. A student and great admirer of Warren Buffett, he’s always looking for investments offering growth at a reasonable price. Outside of finance, Daniel enjoys spending his time with family, sailing, and watching Formula One.

Published April 27, 4:20 pm EDT

When it comes to finding high-quality dividend stocks that offer both value and passive income, it’s becoming increasingly difficult in today’s market.

While markets have continued to push higher and many stocks are trading near their highs, there aren’t a tonne of opportunities to find high-quality businesses at a meaningful discount.

And more often than not, when a stock does look cheap on the surface, there’s usually a reason for it. Either the business is slowing down, the industry is facing long-term headwinds, or the company’s fundamentals are starting to deteriorate. That’s why value investing can be so challenging right now.

However, one area of the market that still offers some opportunities is real estate, specifically residential REITs that have been under pressure in recent years, like Canadian Apartment Properties REIT (TSX: CAR.UN).

In fact, CAPREIT isn’t just a high-quality dividend stock that offers value in today’s market; it’s one of the best investments you can make today.

Not only is it a high-quality, defensive business, but it’s also now trading at a valuation that’s well below its historical average, all while offering more income than it has in years.

And that’s exactly the kind of opportunities that long-term investors can wait years for.

A woman stands on an apartment balcony in a city — Source: Getty Images

Why this dividend stock looks like one of the best value plays on the TSX

Over the last few years, CAPREIT stock has significantly underperformed, not because the business itself has broken, but because the environment around it has changed.

First off, rising interest rates put pressure on the entire REIT sector, increasing borrowing costs and reducing the appeal of income-focused investments. However, at the same time, expectations for rental growth have started to normalize.

After a period where strong immigration and limited housing supply drove rents higher at a rapid pace, investors are now factoring in more moderate growth going forward as supply begins to increase and demand stabilizes.

And as a result, CAPREIT has lost a lot of the premium valuation it once traded at. In fact, in the five years from 2019 through 2024, CAPREIT averaged a forward price-to-adjusted funds from operations (P/AFFO) ratio of 25.9 times, considerably higher than its 10-year average forward P/AFFO ratio of 23.5 times.

However, it’s important to understand that while the growth outlook may not be as strong as it was a few years ago, the core business remains highly intact. Occupancy is still strong, demand for housing is still resilient, and the properties continue to generate reliable cash flow.

In other words, the stock has gotten cheaper, but the business hasn’t meaningfully deteriorated. And that’s exactly why CAPREIT is one of the best dividend stocks to buy now if you’re looking for a value play.

Instead of paying a premium for growth, investors today can gain exposure to a high-quality residential REIT at a discount, simply because expectations have cooled. In fact, while its 10-year average forward P/AFFO ratio is 23.5 times, today CAPREIT trades at just 16.9 times.

Why it’s even more compelling for passive income investors

On top of the ultra-cheap valuation CAPREIT is currently trading at, it also still offers everything long-term passive income investors are actually looking for, which is why it’s one of the best dividend stocks you can buy today.

Residential real estate is one of the most defensive asset classes you can own. That’s what helps keep occupancy high and cash flow relatively stable, even during periods of economic uncertainty.

And with the stock now trading at a much lower valuation, its dividend yield has increased to roughly 4.2%, which is meaningfully higher than it has offered in recent years.

Not only is its 10-year average forward yield considerably lower, at just 3.2%, but in the five years from 2019 to 2024, when its valuation was through the roof, CAPREIT offered an average forward yield of just 2.8%.

And that much higher yield is crucial because not only are you buying the same underlying business at a lower price, but you’re also locking in a higher level of income at the same time.

That’s why CAPREIT is one of the few dividend stocks right now that offers both real value and reliable income.