Income investors love high yields. But how high is too high? A 7% dividend yield in Canada is usually where investors start asking questions. A rising yield can signal trouble, especially when it’s the result of a falling share price or a payout that’s under pressure and cannot be supported.
That being said, not every 7% yield in Canada is automatically a bad investment. There are some investments, particularly real estate investment trusts (REITs), that can support higher payouts backed by dependable assets and steady cash flow.
While there are a few names that offer a 7% yield in Canada, there is one that comes to mind for prospective investors, and that’s Slate Grocery REIT (TSX:SGR.UN).
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Meet the REIT offering a 7% dividend yield in Canada
Slate is a Canadian REIT that owns and operates a portfolio of over 110 grocery-anchored properties in markets across the U.S.
Those properties aren’t shopping malls or residential towers. They are grocery-anchored properties that have secondary tenants. Often, those secondary tenants provide essential services to the communities they serve. That includes doctor’s offices, restaurants, banks, and pharmacies, to name a few.
Those businesses are different from phone or furniture retailers, where consumers may delay purchases when the economy slows. People need food and household products regardless of how the market is faring.
The need for those essentials creates foot traffic and makes Slate’s properties attractive to secondary tenants.
Slate collects rent from those tenants, which, in turn, provides the recurring income used to operate its portfolio and pay out that 7% dividend yield.
How Slate Grocery REIT supports its dividend
Slate currently pays a monthly distribution of US$0.072 per unit, which works out to an annualized US$0.864 per unit. That unique structure means that investors holding Slate units receive the Canadian-dollar equivalent at the exchange rate at the time of payment.
For investors who put $10,000 into Slate, that works out to just under $60 per month. Those not ready to draw on that income can choose to reinvest it. That initial $10,000 would purchase several new units each month through reinvestment alone.
Prospective investors should also note that Slate’s large property network provides some diversification. The company doesn’t depend on any single building or one tenant. Instead, its portfolio of properties provides income from multiple locations and tenants.
Slate also has room to continue growing its rental income. The average rent for the REIT was $12.98 per square foot in the most recent quarter. That’s significantly below the market average, which means that Slate has room to continue raising rent.
Is Slate Grocery REIT a good investment?
Slate offers a combination of high monthly income and exposure to an essential part of the retail market. Its grocery-anchored properties benefit from recurring customer traffic, while its broad U.S. network reduces the impact of any single property.
Strong occupancy and below-market rents give Slate room to grow its rental income.
Throw in the 7% dividend yield that’s paid out monthly, and you have a compelling investment to consider for a well-diversified income portfolio.
