For investors looking to live off income, it’s a tough environment right now. Bond yields are anemic, many dividend stocks have been bid up to elevated levels, and many so-called “high yield” stocks look shaky at best. Investors have to be picky when it comes to yield.
One popular sector for income seekers is real estate, specifically REITs. Companies in the sector tend to pay generous dividends — up to 8%, but usually around 6% — while still giving investors a little growth. Plus REITs offer protection against rising prices, since rents and inflation tend to go up at approximately the same rate. And as long as investors stick to the best in the sector with lower payout ratios, they can expect a steady stream of income.
Let’s take a closer look at both RioCan Real Estate Investment Trust (TSX: REI.UN) and Calloway Real Estate Investment Trust (TSX: CWT.UN), and see if you should prefer one over the other.
The skinny
RioCan is Canada’s largest owner of retail space, with 277 separate properties with more than 39 million square feet in gross leasable area. It has an additional 47 properties and nearly 10 million square feet of space located in the United States as well. It is incredibly diversified, with its leading tenant (Loblaw Companies) representing just 4.1% of its annual revenue.
Calloway is a smaller retail REIT, with 128 locations totaling more than 28 million square feet in area, spread across Canada. Unlike RioCan, it has hitched its horse to one wagon, getting more than 25% of its revenue from one tenant. This would normally be cause for concern, but the main tenant is Wal-Mart, which has grown to be Canada’s second-largest retailer.
Competitive advantage
Both companies have some interesting strategic advantages.
RioCan has begun building residential apartments on top of its retail developments. Since the majority of the cost of a complex is things like buying the land, paving the roads and bringing in utilities, this makes all sorts of sense. Although this is still very new, so far the company says that these buildings cost up to 40% less than a standalone building. These new apartments can either be retained for extra revenue or flipped to a company that specializes in apartments.
RioCan also has a great portfolio, with some huge developments. This makes the company’s locations attractive to prospective tenants, since they become retail destinations. Most of RioCan’s larger locations are essentially open air shopping centers.
The interesting part of Calloway’s portfolio is the draw of Wal-Mart, which can be viewed as good and bad. On the plus side, the presence of Wal-Mart ensures there’s a decent amount of foot traffic, which attracts other retailers. But Wal-Mart is known for being a tough negotiator, which could affect the relationship between the two companies if times get rough. Additionally, Wal-Mart’s presence makes it unlikely any grocery stores will be interested in Calloway’s space, which does limit its potential tenant base somewhat.
Dividends
Both of these companies have stellar dividend histories.
RioCan hasn’t missed a dividend since going public in 1998. Since 2004, the company has only been a moderate dividend raiser, increasing its monthly payment from 10.5 cents per share to 11.75 cents. That’s an increase of 10% over a decade, which isn’t really that exciting. Still, REITs are known more for steady income, not rapidly increasing dividends. Shares currently yield 5.3%.
Calloway also has a solid dividend history. It has paid dividends continuously since 2003, increasing its monthly payout from 9.6 cents per share to 13.3 cents per share where it sits today. That’s an increase of approximately 39% over 11 years, thoroughly trouncing RioCan over the same period. Calloway just raised its dividend as well. Shares currently yield 5.8%.
From a purely dividend perspective, Calloway looks to be the better choice. It gives investors a yield nearly 10% larger than what RioCan is offering. I’d say RioCan is the better operator. It has interesting growth ahead and isn’t so dependent on one main tenant. Both companies are great choices, but I’d lean towards Calloway and its higher dividend.
