Building a reliable passive-income stream doesn’t need to be complicated. In fact, one of the easiest ways to start earning passive income in the stock market is to buy a high-quality real estate investment trust (REIT) and let it do the work for you.
Rather than saving a significant portion of capital for a down payment, finding a property, managing tenants and dealing with all the other headaches that can come with owning investment properties, REITs allow investors to gain exposure to income-generating real estate with a single purchase.
Of course, that doesn’t mean every REIT is automatically a great investment. Investors still need to ensure the portfolio is high quality, the distribution is sustainable, and the units trade at a reasonable valuation.
But when you can find a solid business with a high-quality portfolio, a reliable distribution and a proven model, such as RioCan REIT (TSX: REI.UN), it can be one of the easiest passive-income investments to own.
RioCan owns a massive portfolio of necessity-based retail properties in Canada’s largest and most densely populated markets. And with the units offering a yield of roughly 5.6% today, it’s one of the easiest ways to start generating significant monthly passive income.
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A reliable real estate stock built for steady passive income generation
One of the main reasons RioCan is such an attractive passive-income investment is the quality of its portfolio.
The REIT owns 164 properties with roughly 31 million square feet of leasable space. Many of these properties are anchored by grocers, pharmacies and other retailers that consumers visit consistently regardless of what’s happening with the economy.
That makes RioCan’s rental income highly reliable. Furthermore, because high-quality retail space in Canada’s largest markets is in limited supply, the REIT continues to see strong demand from tenants.
In the second quarter, RioCan’s retail committed occupancy reached a record 98.8%. In addition, the rent on its new and renewed leases was roughly 23% higher than the previous rates, showing just how much demand there is for RioCan’s properties.
That impressive performance helped its commercial same-property net operating income (SPNOI) grow by 4.3%, while its core funds from operations (FFO) per unit increased by 5.3% to $0.40.
RioCan’s core FFO payout ratio over the last four quarters was also just under 74%, showing that the distribution remains well covered while the REIT still retains cash to strengthen its balance sheet and invest back into its portfolio.
An attractive monthly distribution at a reasonable valuation
At the time of writing, RioCan trades around $20.70 per unit and pays a monthly distribution with a yield of approximately 5.6%.
That combination of a high yield and monthly distributions makes RioCan particularly attractive for passive-income seekers, especially with near-full occupancy and rising rental rates continuing to support its cash flow.
Plus, RioCan’s valuation remains reasonable in the current environment. Right now, the REIT trades at roughly 12.6 times its expected FFO over the next 12 months, only slightly above its 10-year average of 12.4 times. Its units also trade at a discount of roughly 16% to its second-quarter net book value of $24.65 per unit.
The biggest risk for investors to keep in mind is RioCan’s debt, particularly if interest rates remain elevated as it refinances maturing obligations. However, with occupancy near 99%, rental rates continuing to rise and the distribution consuming less than three-quarters of its core FFO, RioCan has flexibility to keep strengthening its balance sheet.
So, if you’re looking for an easy way to begin earning significant passive income, RioCan is undoubtedly one of the first stocks I’d consider today. You can buy it once, collect cash every month and benefit as its high-quality real estate portfolio continues generating reliable rental income for years to come.
