How to Set Realistic Expectations for Your Dividend Investments: REITs

Why should we set realistic goals for our investments? So we can focus on what’s important and know if we’re doing it right or wrong. Using REITs, such as Canadian REIT (TSX:REF.UN), as examples, you’ll see how it’s done.

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Before we invest in anything, we should have a goal in mind. The goal needs to be realistic, so that it’s attainable and measurable. For dividend investors, the safety of the dividend, the dividend yield, and the growth of that yield are all essential information.

Here, I will use real estate investment trusts (REITs) as examples to show how to set realistic expectations for different kinds of REITs.

A high-quality REIT

Canadian REIT (TSX:REF.UN) is a conservatively run REIT. The business buys high-quality property assets that help it maintain high occupancy levels and high rental rates. Further, it maintains a conservative payout ratio (about 60%) to ensure it can continue increasing the annual payout every year.

In fact, for 13 years it has increased its distribution, and I dare say Canadian REIT pays the safest REIT yield in Canada.

The last distribution hike was in June, and it increased 2.9% year over year. With funds from operations expected to grow north of 2%, its distribution is also likely to grow around that rate if the REIT doesn’t expand the payout ratio.

So, investors can expect an investment today with a yield of 4.3% to grow by at least 2-3% in the foreseeable future. That implies a total return of 6.3-7.3%.

In this case, shareholders would be foregoing some income growth and returns by sticking to a high-quality REIT.

A high-yielding REIT

Dream Global REIT (TSX:DRG.UN) owns and rents out commercial properties in Germany. Germany is the Eurozone’s largest economy and has a low unemployment rate. So, the real estate market there is one of the most stable in the Eurozone.

Over the past three years Dream Global is among the top three acquirers of office properties in Germany. Now, the REIT owns properties in seven of Germany’s major office markets: Hamburg, Berlin, Munich, Frankfurt, Cologne, Stuttgart, and Dusseldorf.

Since its initial public offering in 2011, it hasn’t increased its distribution, but Dream Global has maintained it. At the current price of $9.7 per unit, it yields 8.3%. So, what Dream Global lacks in distribution growth, it makes up for it with a high yield.

A moderate yielder with growth

With Allied Properties REIT (TSX:AP.UN) you have both a decent yield to start and a growing income. Allied Properties REIT owns and manages a portfolio of primarily Class I office properties in the urban areas of Ville de Quebec, Montreal, Ottawa, Toronto, Kitchener, Winnipeg, Calgary, Edmonton, Vancouver, and Victoria.

For the past couple of years, it has grown funds from operations at a rate of 8%, which is pretty high growth for a REIT. Because Allied Properties REIT’s management incorporates growth into the business model, the REIT was able to increase distributions by almost 25% from 2004 to 2014. In other words, if you had invested in Allied Properties at the start of 2004, you would have seen your income increase by 25% by now.

What Allied Properties lacks in yield compared with Dream Global, for example, it makes up for it with business growth, translating into income growth for shareholders.

Tax on the income

REITs pay out distributions that can consist of other income, capital gains, foreign non-business income, and return of capital. Other income and foreign non-business income is taxed at your marginal tax rate, while capital gains are taxed at half your marginal tax rate.

To avoid any headaches when reporting taxes, buy REIT units in a TFSA or RRSP. However, the return of capital portion of the distribution is tax-deferred. So, it may be worth the hassle to hold REITs with a high return of capital in a non-registered account.

Each investor will need to look at their own situation. If you have room in your TFSA, it doesn’t make sense to hold investments in a non-registered account to be exposed to taxation.

In conclusion

It’s essential to set realistic expectations for your investments, whether it be for income or growth. It’s all right if the numbers don’t come out exactly as you expect. We are talking about the future here.

When we set expectations, we focus on the measurements that are most important to us. And we can look at those measurements later on to see if we’re on the right track. If not, then adjustments need to be made in your investment process.

Should you invest $1,000 in Allied Properties Real Estate Investment Trust right now?

Before you buy stock in Allied Properties Real Estate Investment Trust, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Allied Properties Real Estate Investment Trust wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of CDN REAL ESTATE UN.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

Hourglass and stock price chart
Dividend Stocks

Where I’d Put $50,000 Right Away in Top Canadian Stocks for Growth and Income

TSX dividend stocks such as Savaria and CNQ are top choices for investors looking for growth and income in 2025.

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Dividend Stocks

Invest $25,000 in This Dividend Stock for $536.90 in Annual Passive Income

This dividend stock is one of the best options for those looking to create income long term.

Read more »

A worker overlooks an oil refinery plant.
Dividend Stocks

Where I’d Put $10,000 in Top Canadian Energy Stocks This April for Dividend Income

These three energy stocks are ideal for income-seeking investors, given their solid cash flows and consistent dividend growth.

Read more »

An investor uses a tablet
Dividend Stocks

This Could Be the Top Canadian Dividend Stock to Buy Right Now

Here's why I think Enbridge (TSX:ENB) remains a top option for dividend investors in this current macroeconomic climate.

Read more »

senior man smiles next to a light-filled window
Dividend Stocks

How I’d Invest My $7,000 TFSA Across These 3 Canadian Stocks for Dividend Income

Investors looking for Canadian stocks for dividend income that can last decades should consider buying these three stocks today.

Read more »

A worker uses a double monitor computer screen in an office.
Dividend Stocks

National Bank vs. Bank of Montreal: How I’d Divide $12,000 Between Banking Stocks

Here's how I would think about splitting up a $12,000 prospective investment in National Bank of Canada (TSX:NA) and Bank…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

Canadian National Railway: How I’d Approach This Blue-Chip With $10,000 in 2025

Despite current macro headwinds, Canadian National Railway remains a rock solid, blue-chip pick for long-term investing.

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

April Income Strategy: Where to Invest $10,000 in Big Dividend Stocks

These stocks offer attractive yields for income investors.

Read more »