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yield hog

John Heinzl is the dividend investor for Globe Investor's Strategy Lab. Follow his contributions here. You can see his model portfolio here.

Like the idea of being a landlord, but don't want the hassle of dealing with problem tenants, property damage or maintenance?

Real estate investment trusts could be for you.

REITs can be a great addition to a diversified portfolio. They generate steady rental income and – if you choose your REITs carefully – that income will grow over time. Predicting short-term price movements of any stock is a mug's game, but if a REIT's payout is rising over the long run, ultimately, its unit price should also climb.

Now may be a good time to shop for REITs, because unit prices have fallen as government bond yields have crept higher. That means you'll be getting more cash flow for every dollar you invest. What's more, as my colleague Scott Barlow pointed out on Tuesday, the spread of REIT yields over government bond yields is wide, which has historically indicated solid future returns for REITs.

Keep in mind that if government bond yields continue to rise, REIT prices could come under additional pressure. One way to fight the headwind of rising rates is to stick with REITs that hike their distributions regularly.

That brings us to today's topic: I've selected three high-quality REITs that analysts expect will continue to boost their payouts. Remember to do your own due diligence before investing in any security and to keep your REIT exposure within reasonable limits. A rough rule of thumb is to allocate no more than 10 per cent of your total portfolio to REITs.

Canadian REIT (REF.UN-TSX)

Price: $44.93
Yield: 4.1 per cent

Canadian REIT, or CREIT, is widely considered to be one of Canada's best-managed REITs. With nearly 200 retail, office and industrial properties across Canada and an emerging presence in residential real estate, it offers excellent diversification both by asset class and geography. Thanks to steady growth in funds from operations or FFO – an industry measure of cash flow – CREIT has paid higher distributions for 15 consecutive years, the longest track record for any REIT in Canada, according to the company. Yet its payout ratio – 59 per cent of FFO in 2015 – remains among the lowest in the industry, giving the distribution ample coverage and leaving lots of room for future increases. "We expect continued FFO growth in 2017 and 2018, as challenging Calgary office market conditions … are more than offset by positive contributions from retail and industrial," CIBC World Markets analyst Alex Avery said in a recent note in which he rated CREIT "sector performer" with a 12- to 18-month price target of $50. Reflecting its high-quality portfolio, solid balance sheet and defensive nature, CREIT trades at a premium to other REITs on a price-to-FFO basis. But with the units down about 13 per cent from their peak in July, conservative investors may want to give this solid REIT a look.

H&R REIT (HR.UN – TSX)

Price: $21.12
Yield: 6.5 per cent

Like CREIT, H&R is a diversified REIT that owns retail, industrial, office and residential assets. Unlike CREIT, H&R went for more than three years without a distribution increase – until it announced a 2-per-cent hike on Nov. 14 in conjunction with its third-quarter results. Even as H&R has divested non-core assets, fortified its balance sheet and started raising its distribution again, the units trade at a hefty discount of 14 per cent to H&R's estimated net asset value (NAV), Desjardins Capital Markets analyst Michael Markidis said in a note. Mr. Markidis, who has a "buy" rating and a 12-month price target of $26 on the units, called H&R "a core holding. The underlying stability of its cash flow should become increasingly apparent as we progress through 2017." What's more, the juicy yield appears well-covered given the manageable payout ratio of 75 per cent based on estimated 2017 FFO. CIBC's Mr. Avery also has the equivalent of a "buy" on H&R, citing its high-quality, diversified portfolio, long average lease term of approximately 10 years, large discount (to both NAV and relative to peers on price-to-FFO basis) and "high yield with potential for further distribution increases."

CT REIT (CRT.UN-TSX)

Price: $14.86
Yield: 4.6 per cent

If you're like most Canadians, you probably drop hundreds of dollars every year at Canadian Tire on things such as snow shovels, hockey sticks and wiper fluid. Well, owning CT REIT is your chance to get even: Created in 2013 by Canadian Tire Corp. Ltd., CT REIT collects rent from nearly 300 of the retailer's stores and sister banners such as Mark's and Sport Chek. Thanks to annual rent escalators, property acquisitions and new developments, CT REIT has already raised its distribution three times, including a 3-per-cent increase announced along with third-quarter results in early November. With occupancy of 99.7 per cent, a weighted average lease term of 13 years and a conservative payout ratio of about 75 per cent of estimated 2017 adjusted FFO, CT REIT is widely seen as one of the most reliable REITs in Canada. "Thanks to its strategic relationship with [Canadian Tire], we see dependable growth in-line with peers but with fewer downside risks," RBC Dominion Securities analyst Michael Smith, who has a "sector perform" rating and $15.50 price target, said in a note.

Disclosure: The author personally owns shares of Canadian REIT and CT REIT.