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You don’t have to dig too deep in the TSX Index to find truly standout dividend yields. Undoubtedly, there’s more to hunting down dividend plays (or distributions with real estate investment trusts, or REITs) than screening out the names that yield less than some arbitrary figure (let’s say 5-6%). Other factors, like dividend-growth prospects, stability, and history, must also be considered. Investors should also pay careful attention to how the firm standing behind the dividend is faring in the face of a rather anxious economic environment.
In this piece, we’ll look at one intriguing play in the REIT space that Canadian investors may wish to stash on their radar as we approach the midpoint of the first quarter. As always, investors should focus more on aspects beyond just the size of the yields. Arguably, the size of a yield, though most tempting to passive income investors, is the least important trait of a REIT. In general, the REIT scene offers very generous yields across the board.
As such, I’d argue it makes less sense to extend yourself on the risk front by going after the ones that yield far more than your average REIT. Indeed, higher yields tend to accompany higher risks. And though some of the risks may be worth taking for a shot at locking in a heftier yield, the risk of a dividend cut, I believe, is too high for many passive-income investors who need the monthly cash flows to fund their lifestyle in (early) retirement.
Personally, I’d say that the REIT scene is not the place to be taking on excess risk. Indeed, in today’s red-hot market, there are plenty of other places if you’re seeking to take risks for a shot at greater upside potential.
Canadian Apartment Properties REIT
I think residential REITs are an absolutely fantastic place to be if you’re looking for a good mix of distribution growth and capital gains over time. Indeed, it’s tempting to go all out on yield when you’re retiring or looking to supplement your paycheque on any given month. However, growth is still important, and with a name like Canadian Apartment Properties REIT (TSX:CAR.UN), which has a solid pipeline of residential projects, you’re getting a nice mix of appreciation and distributions (total returns).
At writing, shares of CAR.UN is coming off a very painful 29% plunge from 52-week highs to 52-week depths of $40 and change per share. Undoubtedly, the entire REIT universe has been under pressure lately. But when it comes to CAPREIT, I think the damage is overdone, given the longer-term growth trajectory and its unique positioning in Canadian rental markets that are still quite heated (think Vancouver and Toronto and the surrounding area).
With prized assets, a respectable growth profile, and a nice 3.7% yield, I consider CAPREIT to be a highly underrated REIT to pick up while it’s still down. Sure, the yield isn’t massive, but it is on the high end of the historical range.
Just be ready to ride out the choppiness through the year (1.24 beta means slightly less volatility than average), as bottom-fishing can be tough and not for the faint of heart.