Can This 12% REIT Dividend Be Trusted?

Slate Office REIT (TSX:SOT.UN) has a six-year history of paying market-leading dividends. Now with a yield of 12.4%, can the dividend be trusted?

| More on:

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

In 2016, Motley Fool contributor Nelson Smith wrote that income investors should be wary of “safe” dividend stocks. Even if a company can continue to pay a high dividend, a decline in the stock price could erase the benefits of the income stream.

“There’s one important thing investors can do to protect themselves,” Nelson wrote, “and that’s insist on a reasonable valuation.”

That brings us to Slate Office REIT (TSX:SOT.UN), a REIT stock that is currently yielding 12.4%. Many income investors would be skeptical of such a high yield, and rightfully so. If such a high return could be counted on, surely the market wouldn’t price it so cheaply.

Still, Slate Office has paid out a consistent $0.06250 monthly dividend since 2013 with zero lapses. With a six-year history backing the dividend, can this 12.4% yield really be trusted?

There’s one major risk

Slate bills itself as a “pure-play North American office REIT.”

More than 85% of its properties are located in Canada; however, nearly half are in Ontario, a huge number of which are in Toronto. That’s concerning considering this market could be in the midst of a giant bubble.

Douglas Porter, the chief economist at Bank of Montreal, recently revealed his bearish stance on Toronto real estate. “Let’s drop the pretense,” he said. “The Toronto housing market, and the many cities surrounding it, are in a housing bubble.”

He has a good case considering Toronto home prices have seen their fastest increase since the late 1980s, a period Porter says that “pretty much everyone can agree was a true bubble.”

Does that risk even matter?

While the value of the company’s Toronto portfolio could be overstated due to historically high prices, the stock’s rock-bottom valuation seems to fully account for this risk.

For example, the company’s Greater Toronto Area Joint Venture Portfolio alone has a book value of $530 million. That’s more than the entire market cap of the company, which is currently $420 million. Its remaining U.S. and Canadian properties have a combined book value of around $1.3 billion.

When stripping out debt and working capital, the net asset value of Slate Office REIT is around $644 million, or $8.55 per share. With a current price of $6.04 per share, the stock trades at a 30% discount to its theoretical value.

Let’s say the company took a 50% loss on its Toronto properties. What would the value of the stock be then?

The company would have assets worth about $1.6 billion, while its debt and working capital needs would stay static at $1.2 billion, leaving $400 million leftover for shareholders. With a market cap of around $420 million today, that means there’s fairly little downside to shares, even assuming a rapid deterioration in Slate’s key market.

Here’s what to do

Barring a real estate collapse in Toronto, Slate can likely continue to service its monthly dividend, meaning the 12.4% payout would be safe. If the Toronto market turned south, however, expect this payout to be slashed.

Encouragingly, the actual value of the company likely wouldn’t be much lower than it is today. In total, this isn’t the safest high-yield dividend, but even if the income were cut, the current valuation may not sink much lower.

If you’d like to bump your income levels up a bit while not taking on excess downside risk, Slate Office REIT looks like a great supplement to your portfolio.

Should you invest $1,000 in Royal Bank of Canada right now?

Before you buy stock in Royal Bank of Canada, 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 Royal Bank of Canada 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 Ryan Vanzo has no position in any stocks mentioned.

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

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Here’s Exactly How a $20,000 TFSA Could Potentially Grow to $200,000

Index funds like the iShares S&P/TSX Capped Composite Index (TSX:XIC) are tax free in a TFSA.

Read more »

Dividend Stocks

How I’d Invest $6,000 in Canadian Real Estate Stocks to Build Lasting Wealth

Canadian REITs on sale! See how grocery-anchored retail properties offering 9% yields could turn $6,000 into lasting wealth despite US…

Read more »

rain rolls off a protective umbrella in a rainstorm
Dividend Stocks

Economic Headwinds: Should You Still Consider Buying the Dip?

A market dip might seem like a bumpy road, but it can be far smoother in the future with the…

Read more »

e-commerce shopping getting a package
Dividend Stocks

Consumer Spending Plays Amidst the Current Market Dip

Consumption may go down in market dips, but certain consumer stocks are certainly better off than others.

Read more »

Asset Management
Dividend Stocks

12% Dividend Yield! I’m Buying This TSX Stock and Holding for Decades

Stocks with high-dividend yields carry risks. But they could be a good long-term investment. Here is a 12% dividend stock…

Read more »

Canadian flag
Dividend Stocks

How I’d Build a Foundation of Canadian Value Stocks in My Investment Strategy

Canadian investors can explore iShares Canadian Value Index ETF for value stock ideas to build a foundation for their diversified…

Read more »

Canadian dollars are printed
Dividend Stocks

How I’d Transform a $30,000 TFSA Into a Cash-Flow Machine

Here's why TFSA investors should consider owning dividend stocks such as Mullen Group in 2025.

Read more »

A woman shops in a grocery store while pushing a stroller with a child
Dividend Stocks

Dip Buyers Could Win Big in Today’s Market Dip

If you want to buy the dip, think long-term. Which is why this TSX stock is a top option.

Read more »