Boost Your TFSA Income With REITs, But Avoid 1 Sub-Sector for Now

REITs are excellent investments, although TFSA investors should avoid lessors of office properties in 2022 because of rising vacancies.

| More on:

Many investors have grown fond of real estate investment trusts (REITs), because the asset class offers several benefits. You gain exposure to the real estate sector without a direct investment or actual purchase of physical properties. Besides the bite-sized cash outlay, you become a mock landlord of prime real estate.

Since REITs provide periodic cash flow streams like dividend stocks, they are ideal holdings in a Tax-Free Savings Account (TFSA). However, Canadian REITs took a beating during the global pandemic, posting a negative 20% overall return in 2020. Most of the large landlords have recovered since, although one sub-sector could take longer to get back to normal.

For TFSA investors, industrial REITs the best options to boost tax-free income in 2022. Meanwhile, avoid landlords of office spaces for now as vacancies remain high. Thus, between Dream Office (TSX:D.UN) and Nexus (TSX:NXR.UN), the latter is a better, more stable choice.

Rising vacancies

Dream Office is a prime premier office landlord, especially in downtown Toronto. The $1.18 billion REIT will present its full-year 2021 results next week, but National Bank of Canada’s financial analyst Matt Kornack has lowered his rating for the stock already. Kornack said operating performance has deteriorated, and the REIT could sink deeper if vacancy keeps rising.

After the first three quarters in 2021, there were 29 active properties and one under development. The in-place occupancy rate (total portfolio) went down to 82.7% from 87.8% in the same period in 2020. In downtown Toronto, it fell to 88.2% from 96.7%. Also, net rental income and net income during the period dropped 5.2% and 21.3%, respectively.

In December 2021, Dream Office chairman and CEO Michael Cooper said a potentially delayed return to the office due to an imminent threat of the COVID-19 Omicron variant is a “non-issue.” CFO Jay Jiang added that the balance sheet remains solid with ample liquidity, and there’s very minimal financing risk in 2022.

Investors didn’t lose last year, as the REIT delivered a 30.2% total return. The current share price is $24.50 (-0.02% year to date), while the dividend yield is 4.08%.

Next pure-play industrial REIT

Nexus celebrated its first year on the TSX last February 4, 2022. Last year, the REIT was a big winner with its 59.8% total return. At $12.36 per share, the trailing one-year price return is 52.6%. If you invest today, the dividend offer is a generous 5.18%. You will earn $310.80 in tax-free income if you hold $6,000 worth of shares in your TFSA.

This $712.16 million REIT is keen on growing its industrial portfolio following a very active year. Nexus acquired 24 industrial properties in 2021 and will acquire more in 2022 and 2023, potentially including properties in the United States. Likewise, the high grading of the portfolio’s quality continues as the REIT grows.

Its CEO, Kelly Hanczyk, said the growth in 2021 and the planned further industrial acquisitions positions Nexus as Canada’s next pure-play industrial REIT. Last month, Hanczyk announced the intention to change the name to Nexus Industrial REIT.

Inflation hedge

Industrial REITs are ideal holdings in TFSAs to boost tax-free income. They are also effective hedges or protection against rising inflation.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the 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 »