The 7.3% dividend stock you can trust

A company with a dividend yield above 7% is one that many investors rightly question. Dividend yields typically fluctuate over time along with a company’s stock price. When the stock price of a particular company rises, its returns will fall, and vice versa. Normally there is a certain range within which a certain dividend yield will trade.

For SmartCentres REIT (TSX:SRU.UN), and a select number of other dividend stocks (mostly real estate investment trusts), these returns may be higher. This is mainly due to the structure of these trusts, which have charters that require more than 90% of the net operating income generated to be returned to investors in the form of distributions.

For those looking to create meaningful passive income streams with a high probability of sustained income growth over time, REITs are a good option in that regard. Let’s take a look at why I think SmartCentres is among the best REITs that investors can rely on for this growth, even though the company’s returns are higher than the industry average.

The business model has risks, but these are somewhat limited

As a leading provider of Canadian commercial real estate, SmartCentres focuses on leasing prime commercial real estate to retailers and other entrepreneurs. The company’s portfolio of nearly 200 properties in Canada is among the best in its class in this segment. Most noticeably, these locations are often anchored by Walmarta company that I would argue offers as solid a tenant as it gets.

Essentially, I view SmartCentres as a unique and sneaky way to capitalize on the profitability (and future rental growth) coming from Walmart’s Canadian operations. And even within the company’s portfolio of properties not leased directly to Walmart, the other businesses in various malls across the country benefit from the foot traffic that comes with Walmart’s presence, which leads to very low occupancy rates in the long run.

Why the sky-high dividend yield?

SmartCentres has gone through several periods where its share price has fallen significantly as investors looked to divest their real estate holdings with retail exposure. I think this is generally a misguided view as not all real estate leased to retailers is the same.

Fundamentally, I think SmartCentres is one of the few retail REITs worth considering right now that fully recognizes that consumers are generally pulling back on spending as prices rise. Walmart is one of the last bastions of hope for millions of middle class people, and unfortunately, I think it will remain that way for a while.