One good thing about Canadian stocks is that you can find solid dividend opportunities in the real estate, energy, and financial sectors. Even within dividend stocks, an investor can choose from high-growth dividends, stable ones, monthly payouts, quarterly payouts, dividend compounders, variable and cyclical dividends, and undervalued stocks that give high yield. You can build a passive income investment strategy by allocating capital to each of these stock types.
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My two favourite stocks for monthly passive income
If you are building a monthly passive income portfolio, three sectors pay monthly dividends. REITs that get monthly rent, royalty companies that get monthly royalty, and mortgage companies that get monthly interest. The mortgage companies are currently facing high credit risk and lower-than-expected lending activity. So I would prefer staying away from them for a while.
CT REIT
Among REITs, CT REIT (TSX:CRT.UN) is my favourite pick as it gives a good mix of monthly payouts, dividend stability, growth, and a compounding option. The REIT’s advantage is its organizational structure. Canadian Tire spun off its retail store properties into a real estate investment trust (REIT) structure. The REIT structure enjoys tax-free status if it distributes maximum rental income to shareholders and retains enough for operating expenses.
Canadian Tire gets to deduct rent it pays to CT REIT from its taxable income and earn dividends from the REIT. Their arrangement gives CT REIT the right to first refusal for any new Canadian Tire store being built or intensified. Moreover, rent increases by 1.5% annually. A 90%-plus assured occupancy from the parent and 100% rent receipt with no marketing or brokerage cost is a dream business.
Just as Apple has ample order volume to consume its global suppliers’ capacity, Canadian Tire has ample store openings to keep CT REIT’s hands full and even rent stores from other REITs. CT REIT is paying 72.5% of its cash flows from operations in dividends. Its structural advantage makes CT REIT my favourite. Moreover, it grows its distributions annually by 3% and offers a dividend reinvestment plan (DRIP) where units are bought at a 3% discount from the average market price.
The DRIP gives you a structural advantage as there is no brokerage, automatic monthly reinvestment, or inflation-adjusted returns from 3% dividend growth.
Freehold Royalties
While CT REIT is a long-term evergreen unit to buy in any market, Freehold Royalties (TSX:FRU) is a cyclical growth story. Before the pandemic, the oil and gas industry was going through a mature stage. Many oil companies closed. New capital was scarce in this industry as the world moved towards renewable energy. Only large companies with low production costs thrived.
When the 2022 Russia-Ukraine war revived oil prices, all energy stocks flourished. Freehold Royalties also benefited from this upcycle. It acquired property in the Permian basin in the United States, gaining access to premium light oil and proximity to the Gulf Coast. This was a game-changer for Freehold’s royalty business. The company only buys land; it has no capital costs for building infrastructure, nor does it incur operations and abandonment costs. It earns revenue from royalties, which are paid by major oil companies that extract oil from these lands. The royalty is a percentage of the production value.
Royalty remains healthy if more oil is extracted or oil prices rise. Freehold used this opportunity to strengthen its finances. It can pay its current $0.09 per share monthly dividend even at US$50/bbl WTI.
Freehold’s dividends are a cyclical opportunity that will last as long as oil prices remain above US$50. If oil cyclicality fades, dividends might be difficult to sustain, although the fundamentals and external factors show no signs of slowdown.
Portfolio placement of the two stocks for monthly passive income generation
You can place CT REIT stocks in your core portfolio and keep buying its units at any opportunity you get. A DRIP can compound your passive income. As for Freehold Royalties, it is a good stock to buy and enjoy the 6.5% yield till it lasts. Any signs of a long-term slowdown in oil prices to US$50/barrel could be a signal to exit Freehold.
