REITs are high-yield investments. While most dividend-paying TSX stocks have yields between 2% and 4%, the average REIT hovers around 5%. This gives income-seeking investors a major incentive to invest in these assets. With $100,000 invested up front, you can earn $5,000 a year by investing in a typical REIT. And there are some REITs that can pay even more than that, with yields approaching double-digit territory. That means they have serious income potential.
Although ultra-high yielding REITs aren’t usually the biggest gainers in the markets, a yield pushing 10% is a worthy gain in itself. And right now, there’s one depressed REIT on the TSX that can pay you back 12% of your initial investment year after year.
Slate Office REIT (TSX:SOT.UN) Slate Office is a REIT that invests, as the name would imply, in office buildings. The fact that the company invests in office space means that it’s not exposed to the two real estate sectors that are struggling at the moment: housing and big-box stores.
Housing is currently going through a slump that will most likely correct itself eventually but could continue for some time. Big-box stores suffer from poor outlook because they’re slowly being killed by e-commerce. Slate Office does not invest in either of these stagnant sectors, so it’s fairly well positioned at the moment.
Steady earnings growth Owing to its fortuitous market position, Slate Office is enjoying steady earnings growth. In its most recent quarter, revenue increased by around 25%, while net income soared 57%. At the same time, the REIT grew its assets from $1.2 billion to $1.8 billion. This is steady growth, and it was achieved without taking on an insane level of debt.
A high but unchanging dividend Now we’re at the most interesting thing about Slate Office: its dividend.
Slate Office pays a distribution that works out to about $0.75 a year. Over the past 12 months, Slate Office shares have been falling, which has driven their price down to around $6. That means that, currently, this REIT yields a whopping 12.1% –with a reasonable 70% payout ratio to boot!
Income like that doesn’t come around often, and when it does, many investors wonder if it’s sustainable. In Slate Office’s case, I see no reason why it shouldn’t be. First, its payout ratio is not high — in fact, it’s actually on the low end for a REIT. Second, it’s growing earnings enough each year to keep the payments coming in the future. Third and finally, the company hasn’t missed a single payment in the past five years.
So, it looks like the 12% yield you can grab on this REIT is pretty safe. The only slight area of concern is the fact that the payout hasn’t been growing — but with a 12% yield, do you even need it to?
Fool contributor Andrew Button has no position in any of the stocks mentioned.
The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Motley Fool Canada 2019