Canadian real estate investment trusts have done very well this year. So far in 2019, the S&P/TSX Capped REIT Index is up more than 16 per cent.
But you don’t need to limit your horizons to your home country. REITs in other parts of the world are also doing well, thanks in large part to falling interest rates.
Here’s a U.S.-based REIT exchange-traded fund to consider. It invests in 30 of the highest yielding REITs in the world. The overwhelming majority of these (87 per cent) are in the United States, with the rest spread among France, Australia and the Netherlands.
Here are the details:
Global X SuperDividend REIT ETF
Tuesday close: US$14.34
Entry level: Current price
Annual payout: US$1.18 (trailing 12 months)
Yield: 8.2 per cent
Risk rating: Moderate risk
Performance: This ETF trades within a fairly narrow range (US$13.22 to US$15.99 over the past 12 months). Right now, it’s at about the midpoint of that range. To the end of July, the fund showed a one-year total return of 3.29 per cent and a three-year average annual compound rate of return of 6.4 per cent.
Why we like it: First, diversification. We continue to advise holding some Canadian REITs in your income portfolio, but adding SRET will enable you to diversify, especially into the United States. The second attraction is the yield, which is 8.2 per cent on a trailing 12-month basis. Finally, there’s risk. The beta compared with the S&P 500 is 0.62. That does not mean it won’t lose ground if stocks fall, but any decline should be less than that of the broad market.
Key metrics: The fund was launched in March, 2015, and has about US$295-million in assets under management. The expense ratio is 0.59 per cent.
Risks: This REIT is heavily invested in what are called mortgage REITs in the U.S. These provide liquidity to the real estate market by offering financing for income-producing assets by purchasing or originating mortgages and mortgage-backed securities. If another real estate crisis similar to 2007-08 were to hit the U.S., the securities in this portfolio would come under pressure.
Distribution policy: The ETF pays monthly distributions, currently running at the rate of 10 US cents a unit.
Tax implications: Any distributions received in a non-registered account or a tax-free savings account will be subject to a 15-per-cent withholding tax. Capital gains distributions will be treated as foreign income and are not eligible for the 50-per-cent exemption. To avoid tax problems, buy the units in a registered retirement savings plan or registered retirement income fund.
Who it’s for: This security is for those who want to geographically diversify their REIT holdings and earn above-average cash flow. Note, however, that the total return over time is not particularly impressive.
How to buy: The units trade on Nasdaq, with an average daily volume of 261,000. You should have no problem being filled.
Summing up: Good cash flow, modest total returns, reasonable risk and diversification. That’s the bottom line here.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.