For a while, renewing a Guaranteed Investment Certificate (GIC) required about as much thought as ordering the same coffee every morning. Rates were attractive, your principal was protected, and nobody had to wonder what the stock market was plotting before breakfast.
That decision has become less automatic.
One-year GIC rates at major Canadian banks are now hovering around the high-2% range, while some higher-rate alternatives are around 3.3%. On $10,000, a 3.3% GIC produces $330 over a year.
Not bad
There’s absolutely nothing wrong with that. GICs guarantee principal and interest when held to maturity, making them useful for money you’ll need soon.
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The trade-off appears when that $10,000 is intended to generate income for many years. A fixed GIC rate eventually expires. Inflation keeps moving. There’s no share-price appreciation, and your income doesn’t grow unless future interest rates cooperate.
For money I could leave invested for years, I’d be willing to accept some market volatility in exchange for higher current income and the possibility of growth. One TSX name currently offers both.
CRR
Crombie REIT (TSX: CRR.UN) owns more than 300 properties across Canada, primarily grocery-anchored retail centres, retail-related industrial properties, and mixed-use developments. A major tenant is Empire, the company behind Sobeys, Safeway, FreshCo, and other grocery banners.
That makes Crombie stock rather different from a real estate investment trust (REIT) depending on office workers returning to downtown towers or shoppers suddenly rediscovering struggling malls. People still need groceries when the economy slows.
That dependable traffic supports the other businesses leasing space in Crombie’s properties as well. Investors looking at Canadian REITs therefore get exposure to physical real estate without needing $600,000 and a sudden desire to repair somebody else’s dishwasher.
Into earnings
Crombie stock’s second-quarter results showed 97.5% committed occupancy, close to historic highs. Commercial same-asset property cash net operating income increased 3.2% year over year. Even better, renewed leases covering 121,000 square feet produced an average rent increase of about 11.3%.
That’s how I want a REIT growing. Crombie stock doesn’t need to constantly purchase enormous portfolios just to increase cash flow. Higher rents from properties it already owns can gradually push income upward.
The distribution is moving too. Crombie increased its monthly payment earlier this year to $0.08 per unit, or $0.91 annually. At a recent price around $16.65, that creates a yield of approximately 5.5%. Right now, $10,000 could bring in $546 annually, or $45.50 each month!
Consider it all
Compare that with $330 from a hypothetical one-year GIC paying 3.3%, and Crombie stock produces roughly $216 more annual income at today’s distribution.
Unlike a GIC, investors can also reinvest those monthly payments into additional units. Over enough years, that can turn monthly dividend stocks and REITs into compounding machines rather than simply sources of spending money.
Yet there’s no free upgrade from a GIC. Crombie stock can fall in value, and its distribution isn’t guaranteed. The REIT also carries significant debt, with debt-to-trailing adjusted EBITDA around eight times. Higher borrowing costs can therefore eat into future growth.
Its close relationship with Empire creates tenant-concentration risk as well. Still, distribution coverage provides some comfort. Crombie stock’s second-quarter AFFO payout ratio was approximately 77%, leaving part of its recurring cash flow inside the business.
Bottom line
In short, I wouldn’t move emergency savings or money needed next year from a GIC into Crombie stock. For $10,000 meant to generate income over the next decade, though, I’d rather collect roughly $45.50 every month today while giving the properties, rents, and distribution an opportunity to grow tomorrow.
Sometimes a maturing GIC isn’t just a renewal notice. It’s a chance to ask whether the money can start working a little harder.