Dividend Investors: This Top REIT Now Yields 6%. Time to Buy?

RioCan Real Estate Investment Trust’s (TSX:REI.UN) dividend yield has reached a very attractive level. Is it a good time to buy?

| More on:
office building reaching the sky

After falling ~13% in the past year, RioCan Real Estate Investment Trust’s (TSX:REI.UN) slide doesn’t seem to be stopping any time soon.

Despite the company’s solid position in the REIT space, investors aren’t interested in buying the largest Canadian REIT. For income investors, does this dismal performance provide a buying opportunity or a time to exit?

Let’s find out what the headwinds affecting the RioCan stock are.

Interest rate hikes

REITs generally outperform in an environment when interest rates rise. The reason is simple: a stronger economy means more opportunities for getting long-term leases and the higher occupancy rates.

But this economic logic doesn’t work in Canada. RioCan and other similar REITs mostly have long-term leases and high debt loads. When interest rates rise, so do their borrowing costs. They’re unable to pass on this higher cost to their tenants, because they’ve signed long-term leases with them with very little turnover.

This situation makes Canadian REITs bond-type securities, which are more sensitive to interest rate hikes.

After the two rate increases since July, the Bank of Canada could raise the borrowing two more times by the end of 2018, taking the benchmark interest rates to 2%.

Housing slowdown

The second factor scaring investors away from the Canadian real estate companies is the nation’s overheated housing market. Since peaking in April, home prices in Toronto, Canada’s largest city, have fallen more than 20% on average.

In a worst-case scenario, some investors fear that this cooling might turn into an ugly crash, taking down with it some highly indebted Canadians and overly exposed mortgage lenders.

That crash-landing scenario is also affecting other companies, such as alternative mortgage lenders and some banks.

The chances of such an outcome aren’t very strong though. Most forecasters are predicting a soft landing rather than a crash in real estate values as demand dynamics remain strong, especially in the Greater Toronto Area and Vancouver.

But investors who earn regular income from REITs have a reason to worry. After all, they saw RioCan’s stock price drop by ~60% during the 2008 Financial Crisis.

Should you buy or sell?

After this year’s pullback, RioCan stock now yields ~ 6% on an annual basis, which is close to the best dividend yield on this stock since 2010.

I think the worries making investors nervous aren’t stock specific. If you look at the company’s balance sheet, its earnings, and future growth potential, you won’t see dark clouds hovering.

I think this is a good entry point for dividend investors if they want to add a top-quality REIT to their portfolio. At a 6% dividend yield, you’ll be getting a monthly distribution of $0.115 a share from a company whose tenants include some of the top retailers in the world.

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 Haris Anwar has no position in any stocks mentioned.

More on Dividend Stocks

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Invest Your $7,000 TFSA Contribution in 2024

Here's how I would prioritize a $7,000 TFSA contribution for growth and income.

Read more »

a man relaxes with his feet on a pile of books
Dividend Stocks

CPP Pensioners: Watch for These Important Updates

The CPP is an excellent tool for retirees, but be sure to stay on top of important updates like these.

Read more »

Technology
Dividend Stocks

TFSA Investors: 3 Dividend Stocks I’d Buy and Hold Forever

These TSX dividend stocks are likely to help TFSA investors earn steady and growing passive income for decades.

Read more »

four people hold happy emoji masks
Dividend Stocks

Love Dividend Growth? Check Out These 2 Income-Boosting Stocks

National Bank of Canada (TSX:NA) and another Canadian dividend-growth stock are looking like a bargain going into December 2024.

Read more »

An investor uses a tablet
Dividend Stocks

A Dividend Giant I’d Buy Over Enbridge Stock Right Now

Enbridge stock may seem like the best of the best in terms of dividends, but honestly this one is far…

Read more »