Would You Invest Everything in a 6% Distribution Portfolio?

Recently, I received 2 emails from newsletter subscribers asking what I think about investing massively in Canadian REITs. I guess that both of them are retired as they mentioned that their goal was to receive a consistent stream of income. Well, at first glance, this is exactly the main purpose of investing in Canadian REITs. However, a better question is the following:

 

Would you invest all your money in a few stocks that provide a high dividend yield / distribution rate?

 

Because this is what Canadian REITs are about: a stock paying a high distribution. Some people think it is more secure than a regular stock since it pays a high income and their stock price seems quite stable over time. And now that bonds and CDs are having a hard time yielding over 3% interest rate for 5 years, Canadian REITs look very attractive! But still, are they that safe?

 

Why Canadian REITs are so Popular

 

As I have mentioned on this blog before, Canadian REITs are the last income trust survivors. Prior to 2011, there were plenty of energy income trusts along with many other companies in Canada. Even US investors were granted tax breaks if they had invested in them. During the great years (2003 to 2008), income trusts of all kinds but especially those in the oil industry were paying a 10% distribution while their shares kept increasing in value. This sounds like the “perfect investment”:

 

– Shares value were rising

 

– Distribution yield was awesome

 

– Cash was paid on a monthly basis

 

– There were some tax breaks (as it wasn’t considered as 100% interest income)

 

It was basically a real paradise for any investor, especially for those who were looking for a steady income. However, since almost every company in Canada wanted to become an Income trust at one point, the Canadian Government decided otherwise. As of January 1st 2011, there would only be Canadian REITs that could stay as income trusts and it forced every other company to convert into regular stocks. This is why investors who were used to receiving a steady monthly income from their investments, switched towards REITs to keep their lifestyle.

 

Are Canadian REITs Risky?

That’s a tricky question as you need to treat each Canadian REIT as a stock and look at its financial metrics before making an investment decision. For example, if we take the top 4 out of my top 10 Canadian REITs list, you’ll see that there are some surprises among them:

 

REI.UN – RioCan REIT:

 

 

HR.UN – H&R REIT:

 

 

CWT.UN – Calloway REIT:

 

BEI.UN – Boardwalk REIT:

 

 

When you look at these 4 graphs, they all look pretty good except maybe H&R that started distributing cash to its unit holders in 2008. They show some decent growth (and some like CWT awesome growth!) and a consistent (and increasing) payout.

 

After looking at the top Canadian REITs, I have nothing to say but kudos to those who picked these income trusts back in 2001!

 

However, I wouldn’t go All-in for Canadian REITs

 

There are 2 things that tickles me as an investor if I had to put money in the REIT jar today:

 

#1 Legislation

 

#2 Economic environment

 

There was a huge hit on income trusts when the Conservative government decided to crash the party and end the income trust landscape a few years ago. Therefore, I would be a bit worried to see the government cutting back REITs later on. Because you may not know, but the only reason why REITs are able to distribute so much cash to its unit holders is because they benefit from a special tax structure (provided under the income trust registration). So if there is any change in the tax structure, you will see your payout drop. This is a risk to keep in mind before investing.

 

The second point is the Canadian economic environment. For the past 10 years, prices of property (residential, commercial and industrial) went up and we didn’t suffer a housing crisis in 2008. Therefore, the price of Real Estate has been quite high recently and interest rates are at their lowest .This make things very easy to manage for REITs as they are sitting on a lot of equity and loans are very cheap. For a company in real estate, this is definitely perfect timing. However, what would happen if interest rates would go up and values decline? This could be a very different game.

 

Final Thoughts on Canadian REITs

 

Overall, I think it is a great idea (especially for retirees) to have a part of your investments in REITs. They are fairly stable and provide some great distributions. However, I don’t think that holding 1 or 2 REITs for most of your portfolio is a good idea. As an investor, you never know what can happen on the stock market or to the income trust tax structure. This is why I would mix REITs with steady dividend stocks such as dividend aristocrats or dividend champions.

 

Disclaimer: I don’t have any REITs in my portfolio, do you have any? What is the proportion of your total portfolio? Do you find them attractive?

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