For investors seeking dividends (either high yields or dividend growth) on the cheap, I think the Canadian REIT (real estate investment trust) scene is definitely worth a closer look. Depending on who you ask, the REITs are either in a rather uneventful spot, as the Bank of Canada stays on hold and investors seek to anticipate the next big move (a round of rate hikes would be a gut-punch to the REITs while a cut might just act as a shot in the arm of sorts), or the REITs might be a bit of an uncertain play.
Indeed, their rate sensitivity might be off-putting in spite of the very generous yields offered by some of the names. When you consider inflation has lingered, it certainly does feel like a rate hike, maybe two, cannot be ruled out completely in the next 12 months.
Of course, not all REITs are created equal. Arguably, the office REITs remain in a tough spot while grocery-focused retail REITs remain in a more predictable, comfortable spot. As for residential and industrial, there’s growth to be had, but volatility is a given. In my view, grocery-anchored retail REITs are an underestimated place to put new money to work.
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High-yield deals in the REITs
A name like SmartCentres REIT (TSX: SRU.UN) has a stellar grocery anchor in Walmart (NASDAQ: WMT) at most locations and terrific essential tenants elsewhere that can pay rent without issue even if the Bank of Canada were to start its next rate-hike cycle (something that I don’t expect in the near future).
In my view, Walmart could draw in more traffic to SmartCentres locations, giving other tenants a nice boost, at a time like this, when inflation is encouraging some value-conscious Canadian consumers to drive that extra mile to save big money on the biweekly grocery mega-hauls. Either way, shares of SRU.UN have fallen under a bit of pressure in recent months, now down around 8% from the highs in late June.
What’s more important, in my humble opinion, is the yield, which is nearing 6.5% again. In a soaring market, where yield is becoming scarcer, I think the 6.5% yield on SRU.UN shares is incredibly compelling, especially when you consider its still-high occupancy rates and shift into purpose-built developments that combine the best of residential and retail real estate.
With a well-covered payout and upside in the face of Bank of Canada rate cuts, I think the shares are becoming undervalued and perhaps worthy of side-stepping the next TSX Index dip.
What about the banks
As for cheap bank stocks, I’m no longer sure there are any after the vicious upside surge that the Big Six enjoyed in the past two or so years. Would I want to pay a price-to-earnings (P/E) multiple near 20.0 times for entry at these heights for a yield that’s probably sub-3%?
Probably not. But, at the same time, I think that Scotiabank (TSX: BNS) is a relative value option for those who really do believe in the banks, even at these highs. The stock trades at a relatively decent 17.0 times trailing P/E to go with a 3.7% dividend yield. It’s a low yield for Scotiabank standards, but for the Big Six, it’s not bad.
Combined with the past-year momentum (shares up 60%) and AI-driven operating upside, I’m not against buying Canada’s most international (and cheapest-looking) bank at over $120 per share.
