Most U.S. investors focus exclusively on domestic stocks. However, this is a shame, as some Canadian stocks are more cheaply valued and offer more attractive dividends than domestic stocks.
Let's discuss the prospects of three Canadian stocks, which offer high dividend yields and distribute their dividends on a monthly (instead of quarterly) basis.
A REIT Undergoing a Major Transformation
H&R Real Estate Investment Trust (HRUFF) is one of the largest REITs in Canada, with total assets of approximately $7.5 billion. H&R REIT has ownership interests in a portfolio of high-quality office, retail, industrial and residential properties in North America, with a total leasable area of more than 28 million square feet.
H&R REIT has many insiders owning a significant stake in the company. As a result, the interests of its directors are aligned with those of the unitholders. This is an important characteristic of this REIT. On the contrary, investors should avoid in principle REITs whose management has incentives that are not aligned with the interest of the unitholders.
H&R REIT is currently going through a major transformation. The REIT is divesting its grocery-anchored and essential service retail properties as well as its office properties in order to focus exclusively on residential and industrial properties. According to its strategic plan, H&R REIT aims to have 80% of its properties in the residential category and the remaining 20% in the industrial category by the end of 2026. The goal of this transformation is to accelerate the growth of the REIT.
Moreover, management is trying to enhance unitholder value by repurchasing units at a fast pace, as the stock price is currently trading at a 45% discount to the net asset value of the REIT. In the latest quarter, H&R REIT repurchased 8% of its units at an average price that was 40% lower than the net asset value of the trust.
H&R REIT has exhibited a volatile performance record, partly due to the fluctuation of the exchange rate between the Canadian dollar and the U.S. dollar. Nevertheless, the REIT has grown its funds from operations (FFO) per unit by 7.2% per year on average over the last decade.
Moreover, H&R REIT has a promising pipeline of acquisitions and development projects in Austin, Dallas, Miami and Tampa. These markets are attractive thanks to their superior population and economic growth when compared to the rest of the country. Therefore, H&R REIT is likely to keep growing its FFO per unit meaningfully for many more years.
H&R REIT is currently offering a 4.7% dividend yield. U.S. investors should be aware that the dividend of the stock is affected by the fluctuation of the exchange rate between the Canadian dollar and the USD. On the other hand, the stock has an exceptionally low payout ratio of 21% and a healthy interest coverage ratio of 3.6. As a result, its dividend has a wide margin of safety.
This Stock Is a 'Natural'
Keyera Corp. (KEYUF) engages in the gathering and processing of natural gas as well as in the transportation, storage, and marketing of natural gas liquids in Canada and the U.S. The company operates through Gathering and Processing, Liquids Infrastructure, and Marketing segments. It was formerly known as Keyera Facilities Income Fund and changed its name to Keyera Corporation in 2011. Keyera was founded in 2003 and is headquartered in Calgary, Canada.
Due to the highly cyclical nature of the natural gas industry, Keyera has exhibited a volatile performance record. However, in contrast to most of its peers, the company enjoys some important competitive advantages. First of all, it has assets in high-value markets, which are characterized by high barriers to entry. In addition, Keyera has a highly integrated business model, which results in wide profit margins.
The merits of these competitive advantages were in full display in the coronavirus crisis. In 2020, when most gas companies incurred excessive losses due to the collapse of the price of natural gas, Keyera saw its earnings plunge but remained profitable. Even better, as the pandemic has subsided, Keyera has returned to high profitability during the last two years.
Keyera has decent growth prospects ahead. The company aims to grow its earnings by enhancing the capacity of its facilities and by expanding its network. Keyera is currently in the process of integrating its North region gathering and processing facilities with the heart of its integrated value chain at Fort Saskatchewan. When this project is completed, it will significantly enhance the growth potential of Keyera. On the other hand, investors should never forget the inevitable cyclicality of the business of Keyera, which results from the wide swings of the price of natural gas.
Keyera is currently offering an above-average dividend yield of 6.4%, which is quadruple the 1.6% yield of the S&P 500. The company aims to maintain a payout ratio between 50% and 70% and has an admirable growth record, as it has grown its distributable cash flow by 7% per year on average since 2008. Nevertheless, the dividend is not safe due to the cyclical nature of the natural gas industry.
A Trust You Can 'Root' For
A&W Revenue Royalties Income Fund (AWRRF) , a limited purpose trust, holds the investment in A&W Trade Marks, which through its ownership interest in A&W Trade Marks Limited Partnership owns the A&W trade-marks used in the A&W quick service restaurant business in Canada. The company was founded in 2001 and is based in North Vancouver, Canada.
The trademarks of A&W Revenue Royalties Income Fund comprise some of the most popular brand names in the Canadian foodservice industry. Trade Marks licenses these trademarks to A&W Food Services of Canada in exchange for a royalty of 3% of the sales of the restaurants in the Royalty Pool.
This structure renders A&W Revenue Royalties Income Fund a top-line fund, as income is based solely on the sales of A&W restaurants minus the Fund's and Trade Marks' minimal operating expenses, interest on Trade Marks' debt and income taxes. In other words, the royalties of A&W Revenue Royalties Income Fund are not affected by the fluctuations of earnings or expenses associated with an operating business.
A&W Revenue Royalties Income Fund is currently offering an above-average dividend yield of 5.5%, with a payout ratio of 89%. The dividend that U.S. investors receive is sensitive to the fluctuations of the exchange rate between the Canadian dollar and the USD. It is also important to note that the dividend has remained essentially flat (in USD) over the last nine years.
The same is true for the payout ratio, which has been hovering around 90% for the greatest part of the last nine years. Moreover, A&W Revenue Royalties Income Fund incurred a 16% decrease in its earnings per share in 2020 due to the coronavirus crisis. It is thus evident that the dividend of the stock has a thin margin of safety.
Final Thoughts
The above three Canadian stocks are offering above-average dividend yields and distribute their dividends on a monthly basis, thus providing a smooth income stream to their shareholders.
They also have a high-quality business model in place. Therefore, they are attractive candidates for the portfolios of income-oriented investors. Among the three stocks, H&R REIT is offering the lowest yield but its dividend has by far the widest margin of safety.
