Real estate investing is a good way to diversify and add another asset class to your portfolio, which will reduce overall risk. Real estate investment trusts (REITs) are an option for income and growth investors. REITs require significantly lower capital compared to traditional real estate investments.
REITs allow investors to pool their money and invest in a portfolio of properties and can be great long-term investments. While they are technically stocks, these companies primarily provide investors with exposure to real estate assets.
You can generate a steady stream of dividend income by investing in diversified REITs, as these trusts have a high payout ratio due to stable and predictable cash flows. One such Canada-based company is RioCan REIT (TSX:REI.UN), which is one of the largest REITs in the country.
RioCan has a market cap of $4.8 billion and an enterprise value of $11.2 billion. It owns, manages, and develops retail-focused mixed-use properties located in prime, high-density transit-oriented areas.
It ended 2019 with 220 properties with an aggregate net leasable area of 38.4 million square feet, which includes office, residential rental, and 14 development properties.
RioCan stock has lost significant momentum in 2020
The REIT’s exposure to the retail and commercial office sector has driven its stock significantly lower in 2019. As country-wide lockdowns were announced due to the COVID-19 pandemic, the retail sector was hit hard. RioCan stock fell from $28 a share to $12.4 a share before it recovered partially to currently trade at $15.25 per share.
As retail and office REITs are feeling the brunt of the pandemic investors are right to be wary of investing in RioCan, as the length of recovery remains uncertain. If there is a second wave of the dreaded virus, retail-focused REITs will experience another sell-off and trade lower.
In the first six months of 2020, RioCan reported a net loss of $247.9 million compared with a net income of $447.5 million in the prior-year period. Its tenants that operated non-essential businesses were closed for over three months amid the pandemic.
In Q2, the company managed to collect 73% of its rent due. Further, it also counts Bed Bath & Beyond, Costco, Canadian Tire, and Best Buy as its tenants. These are huge retail companies that will provide RioCan with a semblance of certainty.
The Foolish takeaway
While Q2 was one of the worst quarters for most companies across sectors, RioCan’s funds from operations per unit stood at a positive $0.35, though lower compared to prior-year figures of $0.48.
RioCan stock is trading 45% below its 52-week high, which indicates its dividend yield is 6.3%. This means you can generate close to $630 on a $10,000 investment in RioCan. The company cut its dividends by 33% to $0.96 per unit from $1.44 in 2019 to offset falling rental revenue.
There is a good chance that RioCan will lower its dividends further if the macroeconomic weakness persists and Canada has to reinforce lockdown restrictions.
The post Should You Buy RioCan REIT for its 6.3% Dividend Yield? appeared first on The Motley Fool Canada.
The Motley Fool recommends Costco Wholesale. Fool contributor Aditya Raghunath has no position in any of the stocks mentioned.
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