Written by Amy Legate-Wolfe at The Motley Fool Canada
Canadian real estate investment trusts (REIT) have long been considered a strong long-term option for creating passive income. After all, REITs must payout 90% of net income to shareholders, and that usually comes in the form of dividends. This can therefore be a strong strategy for investors looking for passive income through regular dividend payments.
The issue is that if these companies aren’t making a lot of net income, then those dividend payments can be smaller and smaller. That’s why the sector matters. Investors will want to consider not just a strong REIT stock, but the sector in general. So let’s look at three sectors with corresponding REITs that could set up investors for strong passive income.
Industrial REITs
First off, industrial REITs focus on properties like warehouses, distribution centres, and manufacturing facilities. The growth of e-commerce has significantly increased the demand for logistics and warehousing space. Online shopping requires extensive logistics and distribution networks. Furthermore, companies are investing in more localized supply chains, increasing demand for industrial space.
That’s why I like a company such as Granite REIT (TSX:GRT.UN). The company boasts a robust portfolio of high-quality properties. It focuses on industrial, warehouse, and logistics properties, which are critical components of modern supply chains, especially with the rise of e-commerce.
The dividend stock is well known for long-term leases with high-credit tenants, many of which are involved in essential industries. This results in stable and predictable cash flows. So with a dividend yield of 4.68% and stable 95% payout ratio, it’s a strong dividend stock to consider.
Healthcare REITs
Another strong sector for investors to consider are healthcare REITs. Healthcare REITs invest in properties like hospitals, nursing facilities, and medical offices. The area benefits from the increasing demand for healthcare services as the population ages. Plus, long-term leases with healthcare providers ensure stable and reliable income streams.
Therefore, another dividend stock investors will want to consider is NorthWest Healthcare Properties REIT (TSX:NWH.UN). NorthWest REIT benefits from the specialized nature of healthcare properties. Yet it is still diversified with exposure around the world to a variety of healthcare properties.
Yet these properties all offer one thing: long-term lease agreements. The company currently holds a 13.3-year average lease agreement. What’s more, the company uses long-term, triple-net leases, where tenants are responsible for property taxes, insurance, and maintenance. This lease structure provides predictable and stable income, reduces operating costs, and minimizes financial risk for the REIT. So with a dividend yield of 6.9% and a rising share price, it’s another strong dividend stock to consider today.