A monthly deposit feels wonderfully useful when the bills also insist on arriving every month. That can make a high-yielding stock or real estate investment trust (REIT) look like the obvious upgrade from a guaranteed investment certificate (GIC). Why settle for 3% to 4% when you can collect 7% and get paid every month?
Well, because the extra income comes with something your GIC doesn’t have. That share price can fall while you’re collecting it.
Hold a GIC according to its terms and its return is contractual. A real estate investment trust (REIT) makes a different offer. You get regular distributions, plus a unit price that can wander wherever the market feels like sending it.
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Extra income
SmartCentres Real Estate Investment Trust (TSX: SRU.UN) currently pays $0.15 per unit each month, or about $1.85 annually. At $26.38, that works out to a yield of roughly 7%. A $10,000 investment leaves $1.98 in cash and produces about $58.43 every month.
| COMPANY | RECENT PRICE | NUMBER OF UNITS | ANNUAL DISTRIBUTION | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| SmartCentres | $26.38 | 379 | $1.85004 | $701.17 | Monthly | $9,998.02 |
Compare that with roughly $350 a year from a 3.5% GIC on the full $10,000. SmartCentres gives you about $351 more annual income. That could be an easy win, but remember the share price. A decline of only about 3.5% on the $9,998 invested would wipe out that entire first-year income advantage, before taxes and assuming the distribution stays unchanged.
That’s why I wouldn’t use this REIT for money I know I’ll need next year. The case gets much stronger when I can give rental income and property values time to do their job.
The payout
SmartCentres owns retail properties and also develops mixed-use real estate. The good news is that tenants still seem very interested in the space. Occupancy reached 98.1% in the second quarter, while renewal rents excluding anchor tenants increased 12%. Still, rising rents don’t automatically mean more cash lands in an investor’s pocket.
Funds from operations (FFO) with adjustments came in at $0.54 per unit, down slightly from $0.55 a year earlier as higher interest and administrative costs ate into some of those rental gains. Three monthly distributions total about $0.46 per unit. Compared with that $0.54 of adjusted FFO, the rough payout comes to about 86%.
That’s where I’d keep an eye on refinancing. REITs tend to carry plenty of debt, and higher interest rates can make old loans considerably less friendly when they mature. Great occupancy helps, but so do higher rents. Neither means much if refinancing costs swallow the improvement.
Monthly isn’t magic
There’s also no rule saying a GIC has to be useless for monthly expenses. You can keep a separate cash buffer or stagger several GIC maturities so money becomes available at different times.
That’s why I wouldn’t let 12 monthly REIT deposits decide the entire investment. Start with the date you actually need the principal back. Then choose the investment around it.
A Tax Free Savings Account (TFSA) can also make the comparison cleaner by sheltering qualifying REIT distributions and gains. Outside registered accounts, REIT distributions can contain several different tax components, so comparing only headline yields can give a misleading picture. Valuation deserves its own check too. Annualizing SmartCentres’ $0.54 quarterly adjusted FFO gives $2.16 per unit. Against the $26.38 unit price, that’s roughly 12.2 times that illustration.
Bottom line
SmartCentres deserves a look alongside other Canadian dividend stocks for investors who want monthly income. Just don’t compare its 7% yield with a 3.5% GIC and stop there.
The REIT gives you more income because you’re taking more risk. For money I’ll need soon, I’d keep the boring certainty. For money that can stay invested through a few ugly months, SmartCentres becomes much more interesting.
Monthly income is useful. Being able to leave the principal alone when the market misbehaves is what makes it work.
