Seasoned income investors know that there’s more to dividend investing than just chasing the highest yield. That being said, there is one investment on the market that carries a 7.5% TSX dividend yield that is worth a closer look.
That stock is Slate Grocery REIT (TSX: SGR.UN), and here’s why it could be a good addition to your portfolio.
What Slate Grocery REIT does
Slate is one of the better-known Canadian REITs. The company owns and operates a portfolio of grocery-anchored retail properties across the United States. In addition to the primary grocery tenants on those properties, Slate also has smaller secondary tenants that provide traffic and, by extension, rent.
Those secondary tenants include pharmacies, restaurants, banks, and other necessity-based businesses. It’s worth noting that those businesses are ones that consumers continue to visit regardless of how the broader economy fares.
This gives Slate a more defensive tilt over a traditional retail operation focused on non-essential spending. Grocery stores draw a steady stream of foot traffic that tends to bleed over to those secondary tenants, making them more valuable.
In total, Slate operates 115 properties that boast an occupancy rate of 93.6% as per the most recent quarter.
The company also completed over 569,000 square feet of leasing activity during the quarter.
Why this TSX dividend yield looks unusually high
When evaluating Slate, it’s easy to see why that yield attracts attention. At the current distribution, Slate pays out US$0.072 per unit each month. For investors that drop $12,000 into the REIT, that works out to approximately $900 per year factoring in the exchange rate.
That’s not enough to retire on, but that 7.5% yield is more than enough to generate a handful of new units each month from reinvestments alone. Over a longer period, that can compound into a substantial income stream.
More importantly, that’s far above what investors would receive from many of the other large Canadian dividend stocks or even broad-market ETFs.
The numbers behind Slate Grocery REIT’s monthly payout
Part of the reason for the elevated TSX dividend yield is that REITs like Slate are sensitive to interest rates and financing costs. When interest rates rise, the cost of borrowing and maintaining debt increases.
This puts pressure on businesses that are more capital intensive, such as REITs with their large real estate portfolios.
Slate’s monthly distribution looks manageable on an FFO basis. In the most recent quarter, the REIT generated funds from operations (FFO) of US$0.24 per unit, resulting in an FFO payout ratio of 87.6%.
However, the adjusted FFO payout ratio came in higher at 113.1%. AFFO accounts for additional recurring costs such as capital expenditures, leasing costs, and tenant improvements. These reduce the cash available after maintaining and leasing the portfolio.
This means that a payout ratio above 100% translates into Slate distributing more than it generates on that adjusted basis. For investors, that becomes something to watch over time.
That’s where Slate’s leasing activity and potential for higher rents become important. Both can help support stronger cash flow and make the distribution more sustainable over time.
In the most recent quarter, Slate announced that renewals were completed at a rate of 16.7% above expiring rents. The company also reported that new deals were completed with rates 41% above in-place comparable rents.
The quarterly update also highlighted another point that speaks to Slate’s future potential. The average in-place rent for the REIT came in at US$13.10 per square foot during the quarter. That’s far below the market average of US$24.79 per square foot.
This means that Slate has plenty of long-term potential to continue raising rents.
Is Slate Grocery REIT stock worth buying for its dividend?
No stock is without risk, and that includes investments such as Slate which offers some defensive appeal. Fortunately, Slate’s portfolio is well-diversified, has strong occupancy numbers, and caters to defensive retail segments.
Add in the potential for rents to rise over time, and you have more than just an ultra-high TSX dividend yield.
So, is the yield too good to be true? Not necessarily.
The AFFO payout ratio is something that investors should watch, but the strength of Slate’s portfolio and its potential for higher rents make it an intriguing option as part of a larger, well-diversified portfolio.
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