Why A Declining Yield for This Company Can Be a Good Thing

Investors seeking yield often look to sectors such as real estate for traditionally higher yields and dividend growth over time. Real Estate Investment Trusts (REITs) are one vehicle which provides investors with much higher payout ratios on average than traditional equities, supported by real estate assets which are generally deemed to be much safer than the assets an average company on the S&P500 would hold on its balance sheet.

As with any firm in any industry, searching for the highest yield is not necessarily the approach to take, particularly in situations when the corresponding payout ratio exceeds free cash flow, or when a company is taking on additional debt to pay an exorbitantly high dividend payment each and every quarter (in many cases sooner in the REIT world).

Killam Apartment REIT (TSX:KMP.UN) is one REIT which has proven itself to be a very stable, growth-oriented REIT over time. This REIT is different from its competitors in how it grows; while many REITs tend to focus on acquiring assets which are already built or in the process of being built (which Killam does as well), one thing Killam does perhaps more than the average REIT is develop properties from beginning to end. Capturing much of the value early on in the value chain allows Killam to keep its average cost per unit low and maximize rents for the areas the company operates in, which tend to be in areas with less competition, away from overheated markets such as Toronto and Vancouver, a strategy many analysts and investors such as myself prefer.

Invest wisely, my friends.