Real estate investment trusts (REITs) can be an integral part of any dividend portfolio. Particularly, they are hard assets that generate rental income, but shareholders don’t have to manage the properties or tenants. Instead, each REIT has a professional management team to do all that.
Some REITs pay exceptionally high yields. Others pay a decent yield to start, but have higher growth forecasts. If investors are able to buy these units at relatively high yields, they can just let the monthly rental income roll in.
Here are several residential REITs that can generate monthly rental income for you.
Canadian Apartment Properties REIT (TSX:CAR.UN) owns interests in close to 43,000 residential units in or near major urban centres across Canada and Dublin, Ireland. It consistently pays out a monthly distribution. In fact, it has increased its distribution 12 times over 18 years. At under $30 per unit, it yields 4.1%. With a payout ratio around 72%, its distribution has a margin of safety.
Northern Property REIT (TSX:NPR.UN) is creating a $3 billion REIT by acquiring True North Apartment REIT (TSX:TN.UN) and $535 million of multi-family portfolios from Starlight Investments Ltd. If the True North transaction successfully closes in October, Northern Property will become the third-largest publicly traded multi-family REIT in Canada.
The REIT will own more than 24,300 multi-family suites across eight provinces and two territories, creating a more diversified portfolio from the resource-rich areas that it was focused in before. Seeing that the oil price and base metals are under pressure, this acquisition may be a good thing.
The transactions aside, Northern Property has increased its distributions eight times in 12 years. Its payout ratio is 70%, and will be more or less unchanged if the acquisition materializes. So, its current yield of 7.9% is not at risk.
Morguard North American Residential REIT (TSX:MRG.UN) had its initial public offering in 2012. It has a portfolio of 12,850 suites in North America. Specifically, it has 30 apartment communities located in Alabama, Colorado, Florida, Georgia, Louisiana, North Carolina, and Texas, and 14 Canadian residential apartment communities situated in Alberta and Ontario.
At $10.2 per unit, it yields 5.9%. With a payout ratio of 72%, its distribution is sustainable.
Boardwalk REIT (TSX:BEI.UN) owns over 34,600 apartments across Alberta, Saskatchewan, Quebec, and Ontario. Since 2005, Boardwalk REIT has paid a regular, monthly distribution. Over the course of nine years, its distribution has grown at an annualized rate of 5.5%. Its payout ratio of 67% implies there’s a margin of safety for its distribution.
Tax on the income
REITs pay out distributions that are unlike dividends. Distributions can consist of other income, capital gains, foreign non-business income, and return of capital. Other income and foreign non-business income are taxed at your marginal tax rate, while capital gains are taxed at half your marginal tax rate.
So, to avoid any headaches when reporting taxes, buy and hold REIT units in a TFSA or an RRSP. However, the return of capital portion of the distribution is tax deferred. So, it may be worth the hassle to buy REITs with a high return of capital in a non-registered account.
Of course, each investor will need to look at their own situation. For instance, 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
Residential REITs offer a stable income for any portfolio.
Valuation wise, Northern Property and Morguard North American are priced at a discount, while Canadian Apartment Properties is overvalued and Boardwalk REIT is in a fair-value range. If you’re looking for the highest income, go with Northern Property. However, expect it to remain depressed for as long as the oil and mining sectors are doing poorly. Generally, higher yields imply higher risk.
