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I’m curious to get your take on Plaza Retail Real Estate Investment Trust (PLZ.UN). It has a 7-per-cent yield, but that seems a bit high and I’m wondering if it’s a red flag.

You’re right to ask questions when a yield gets into the high single digits. Too many investors jump into stocks based solely on their fat yields, only to be burned when the payout is cut.

But in Plaza Retail’s case, I don’t believe there is any reason to worry. (Disclosure: I own the units personally.)

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Based in Fredericton, Plaza owns a $1.1-billion property portfolio that consists primarily of open-air shopping centres and single-tenant retail outlets, the vast majority of which are located in Ontario, Quebec and Atlantic Canada.

Its tenant mix includes many essential needs and value-oriented retailers, with more than 90 per cent of gross rents coming from national chains such as Loblaw, Shoppers Drug Mart, Dollarama, Canadian Tire, Sobeys, Tim Hortons and other fast-food restaurants.

Plaza wasn’t completely unscathed by the pandemic – its net operating income fell 3.4 per cent in the first quarter, primarily because of bad debt expense – but the REIT is emerging from the downturn in a strong position. In the first quarter, Plaza collected 98.6 per cent of gross rents from tenants, and leasing activity has been ramping up as vaccination campaigns hit their stride and consumers look forward to the easing of pandemic-related restrictions.

“We’re seeing a definite uptick in opportunities. We continue to see demand from dollar and grocery stores, pet retailers, value retailers, cannabis retail and fast-food players for pizza, chicken, burgers and Mexican food,” Michael Zakuta, Plaza’s president and chief executive officer, said on the first-quarter conference call earlier this month.

Far from retrenching, Plaza is growing. It has nine new development and redevelopment projects scheduled for completion in 2021 and 2022, with about 20 more in the planning stages.

As for Plaza’s distribution of 28 cents annually, analysts say the payout is well covered. Based on projections for adjusted funds from operations – a real estate cash flow measure – analyst Frédéric Blondeau of IA Securities calculates Plaza’s payout ratio at an estimated 82 per cent for 2021, falling to 79 per cent in 2022. These are very manageable numbers for a REIT.

Plaza’s distribution isn’t likely to grow for the next couple of years, but given its stable tenant mix, strong rent collection, comfortable payout ratio and solid growth opportunities, the 7-per-cent yield looks very safe.

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My daughter’s employer will be offering a defined contribution pension plan soon, and I wanted to do some research to help her choose investments. I know mutual funds can have high costs, so I am a bit wary. What do you suggest?

With a defined contribution plan, the employee contributes a specific amount each year, often with matching amounts from the employer. While the contribution amount is defined, the value of the pension at retirement depends on the performance of the investments. This differs from a defined benefit plan, in which the employer guarantees a set retirement pension based on the employee’s salary and years of service. Because the employee bears all the risk in a DC plan, choosing the right investments is important.

Your daughter’s company will provide her with a menu of funds to choose from. The specific funds, and their costs, vary widely by employer, but the list typically includes a mix of actively-managed and index-tracking products. I would stick with index funds, whose lower costs give them an edge, especially over long periods.

To help employees construct well-balanced portfolios, most DC plans now offer several “target date” funds whose assets – usually other index funds – are diversified globally and get more conservative as the employee’s retirement date approaches. If your daughter expects to retire in 30 years, for example, she could choose a fund with a target date of 2050.

A target date fund would be the simplest solution, but without knowing the specific options available to your daughter, I can’t comment on whether it would be her best choice. For what it’s worth, I was able to obtain a list of funds, and their associated management expense ratios, from one of my moles inside a mid-sized company with a DC plan.

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A few examples: BlackRock LifePath Index 2050 Fund (MER: 0.54 per cent); BlackRock LifePath Index 2030 Fund (0.42 per cent); TD Asset Management U.S. Index Fund (0.26 per cent); TD Asset Management Canadian Equity Index Fund (0.26 per cent); MFS Canadian Equity Fund (0.44 per cent); Invesco Global Company Fund C (0.78 per cent).

As you can see, the plain-vanilla index funds have a clear cost advantage, but the MERs of the other funds are still reasonable. It’s possible, however, that the funds in your daughter’s DC plan will have higher MERs. Keep in mind that, if your daughter is several decades from retirement, a portfolio tilted heavily toward equities will offer the most potential for growth.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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