Your Future Self Is Counting On You to Buy This Canadian Dividend Stock Today

Dividend stocks that paid handsomely to their shareholders back in the 90s are now gradually phasing out their returns. Many have suspended their dividend reinvestment plans (DRIPs), and many have slowed or ended their double-digit dividend growth. Dividends of Enbridge, Canadian Utilities, and telecom stocks have normalized after a phase of high growth.

Behind dividend normalization is growing balance sheet leverage and capital expenditure. The days of 8–10% safe dividend yields are long over. Those who invested in these stocks during their growth phase are now sitting on compounded passive income even after their dividends normalized. Hence, it is better to lock in high yields when there is an upcycle.

Buy this Canadian dividend stock today for better future returns

Although dividends of Enbridge have normalized, it is a stock to hold if you bought it in 2020–2022 and locked in an 8% yield and 3% dividend growth. Such a yield is unlikely to return anytime soon.

However, CT REIT (TSX: CRT.UN) is a stock worth buying today for its 5.9% dividend yield, 3% dividend growth, DRIP, and additional DRIP units of 3% of the reinvested amount. A combination of these four elements is rare, especially in a monthly dividend stock. With time, these elements will fade, and distributions will normalize as they did with other REITs. SmartCentres REIT (TSX: SRU.UN) suspended its DRIP and has not grown its distribution since 2021 amidst high balance sheet leverage. While SmartCentres offers a 6.9% dividend yield, CT REIT is still a better option for future returns because of its compounding opportunities.

The 5.9% vs 6.9% dividend yield

If you invest $10,000 in each of the two REITs, the 6.9% yield of SmartCentres REIT might look attractive. But the amount is unlikely to grow until the REIT reduces its leverage and improves its payout ratio, which is currently 86.7% of adjusted funds from operations (AFFO). On the flip side, CT REIT’s 72.7% payout ratio gives it ample room to keep growing dividends.

The 3% average annual dividend growth

CT REIT can offset the $8.69 gap in annual dividends in two years by growing its dividend at an average annual rate of 3%. The REIT funds this dividend growth through a 1.5% annual increase in rent for its largest tenant, Canadian Tire, the addition of new stores, and intensification of existing stores.

The DRIP and the 3% additional unit

CT REIT is among the few monthly dividend payers that offer DRIP. It means the $48.51 monthly dividend can be used to buy more CT REIT units under DRIP. With 3% additional units, you will get DRIP units worth $49.97, depending on the average unit price. The accumulated DRIP units will also pay distributions.

How all four CT REIT elements add up

Assuming CT REIT’s unit price increases by $2 every two years and the dividend grows by 3% annually, the four elements will work in the following manner.

A $10,000 investment today will buy 594 CT REIT units, which will give $583 in annual dividends. The reinvested dividend, after adding 3%, comes to $600.56, which can buy 32.5 DRIP units at an average unit price of $18.50. The additional DRIP units and 3% dividend growth will increase next year’s annual dividend to $633.38, and by July 2028 to $689, which comes to $57.43 a month.

The above calculation uses annual compounding, but CT REIT will do monthly compounding. This means the dividend amount will be higher.