Investors looking for reliable passive income often gravitate toward stocks that pay dividends quarterly. However, monthly dividend payers can be even more attractive, especially for retirees and income-focused investors who prefer to be paid every month.
One Canadian stock that deserves attention today is Canadian Apartment Properties REIT (TSX: CAR.UN), commonly known as CAPREIT. With a cash distribution yield of about 4.4%, paid out as monthly distributions, and significant long-term recovery potential, CAPREIT offers a compelling opportunity for patient investors willing to look beyond near-term challenges.
Compared with the broader Canadian market, CAPREIT’s income is particularly appealing. The iShares S&P/TSX 60 Index ETF (TSX: XIU), a useful proxy for the Canadian stock market, currently yields about 2.1%, less than half of CAPREIT’s payout. For investors seeking dependable income, that difference can add up substantially over time.
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Why CAPREIT looks undervalued
One of the most compelling reasons to consider CAPREIT is its valuation. The residential REIT currently trades near its lowest valuation levels in more than a decade. At roughly $35 per unit at the time of writing, analysts see meaningful upside ahead, with the consensus price target implying approximately 23% capital appreciation potential.
The market’s pessimism has also created a notable disconnect between CAPREIT’s share price and the value of its underlying real estate portfolio. At the end of the first quarter (Q1), the REIT’s net asset value (NAV) stood at $54.79 per unit, meaning the stock trades at a discount of roughly 36%.
For long-term investors, purchasing quality assets at a substantial discount can be a powerful driver of future returns.
Understanding the current headwinds
CAPREIT has not been immune to the pressures facing the real estate sector.
Higher interest rates remain a key challenge. Because real estate businesses rely heavily on debt financing, elevated borrowing costs can reduce profitability and limit growth opportunities. At the end of Q1, CAPREIT’s total-debt-to-gross-book-value ratio increased to 40.3% (from 37.7% a year earlier), while its weighted average mortgage interest rate rose to 3.3% (versus 3.2% a year ago).
The rental market has also become less favourable than it was during the post-pandemic boom. Slower immigration-driven population growth and increased housing supply have moderated rental demand, leading to softer rent growth across many markets.
In addition, CAPREIT has been actively selling non-core assets in Canada and Europe as part of a long-term portfolio optimization strategy. While these dispositions should strengthen the portfolio over time, they have temporarily weighed on near-term financial results. In Q1, operating revenue declined 2.1% year over year to $248 million, while net operating income slipped 1.9% to $155 million.
Why income investors should still pay attention
Despite these challenges, CAPREIT continues to demonstrate resilience. Occupancy rates remain strong at approximately 97% across its portfolio across major urban markets, highlighting the ongoing demand for rental housing.
Importantly, investors are being paid well to wait through monthly cash distributions. The combination of a 4.4% yield, strong occupancy, a discounted valuation, and potential sector recovery creates an attractive risk-reward profile for long-term investors.
Investor takeaway
CAPREIT faces near-term headwinds from higher interest rates, slower population growth, and portfolio restructuring. However, the stock’s monthly cash distribution – an attractive 4.4% yield, strong occupancy levels, and significant discount to NAV make it a potentially compelling option for patient investors. For those with a five-year investment horizon or longer, CAPREIT could offer both dependable income and meaningful capital appreciation as conditions in the residential REIT sector improve.
