There are many ways to build a dividend portfolio, especially in Canada. Think of dividends as all possible ways to earn passive income without working in real time. You can earn income from rent on property or equipment, royalties, or ad revenue. Speaking of rent, one of the most lucrative markets is retail shops. And SmartCentres REIT (TSX:SRU.UN) is the largest retail REIT in Canada.
Three reasons why SmartCentres REIT is a buy
Strong tenant base
The real estate property is as good an income generator as its tenant. SmartCentres REIT earns 23% of its revenue from Walmart. The top nine retailers after Walmart account for another 22% of its revenue. Among them are Canadian Tire and Loblaws. More than 60% of its tenant base is comprised of essential services.
Prime location
SmartCentres REIT has 195 properties at key intersections across Canada, making it accessible to 90% of Canadians. In the vast lands of Canada, these hot spots are the crowd pullers, the most desired feature for retail properties.
Moreover, the REIT is building residential and commercial properties near its retail properties to enhance the rental value of its stores. It sells houses and offices, and attracts grocers and other Walmart-anchored stores to keep occupancy levels high.
Strong balance sheet
SmartCentres has high debt of $5.4 billion against $4.4 billion in equity because of its strong development pipeline. Its adjusted debt is 9.6 times the adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). However, this debt is manageable as the REIT has spread it out till 2030. Most of the debts are unsecured debentures that can be renewed.
When interest rates were at a peak between October 2023 and June 2024 and real estate prices were falling, SmartCentres REIT’s dividend payout ratio crossed 100%. Even then the REIT retained its distributions over hopes of a market recovery. During that period, its unit price fell to a low of around $21 as the fair market value of its property portfolio fell.
SmartCentres REIT’s 7.2% dividend yield
As the real estate market recovers, the fair market value of SmartCentres’s properties is increasing. Moreover, rent renewals have increased its rental income, reducing its dividend payout to 97% of adjusted funds from operations.
While the net asset value (NAV) of the REIT’s portfolio has increased to $34.64, the unit trades at $25.47, a 26% discount to NAV. The REIT has never slashed distributions in 23 years of its distribution paying history.
It is a good opportunity to buy the REIT at the dip and lock in a 7.2% yield, while the REIT trades at a discount. It provides monthly payouts.
Who could consider investing in SmartCentres REIT?
Investing in a stock just because of its fundamentals is not enough. Its returns should align with your financial goals to make investing efficient. SmartCentres REIT is a dividend stock with a good risk-reward ratio suitable to meet various financial goals.
- If you are nearing retirement and need your portfolio to give immediate monthly payouts without significantly impacting the principal amount, this REIT is a good option.
- SmartCentres REIT does not grow its distributions with inflation. So, if you have a specific amount with which you seek to supplement your working income temporarily, it is a good investment.
- The REIT can be used to diversify your high-risk, high-yield dividend portfolio into the real estate sector, as very few REITs offer over a 7% yield.