Investors have different income goals, and sometimes, they’re forced to buy high-yield stocks, such as Alaris Royalty Corp. (TSX:AD), which currently offers a whopping dividend yield of 10.3%.
Investors should ask themselves why a company is paying such a high yield. Heck, even when Alaris was trading at higher levels and offered a +7% yield in 2015, it was still considered a high-yield investment.
How High of a Yield is Too High?
Typically, when a stock offers a yield of 6% or higher, investors should be extra careful. In my recent article on Seeking Alpha, I discussed the risks of investing in Alaris. So, I won’t go into the details of that.
Here’s a quick summary, though. Alaris lends money to companies and gets monthly cash distributions in return. Ideally, Alaris would like to partner with these companies for the long haul to get a high income from them.
To determine if a dividend is safe or not, one must analyze the company that’s paying the dividend. There are multiple things to look for.
Is the company financially strong?
Dividend companies with financially strong profiles are less likely to cut their dividends. So, invest in companies with credit ratings of BBB+ or better to improve your dividends’ safety.
For example, Telus Corporation (TSX:T)(NYSE:TU) has a BBB+ S&P credit rating.
Are the earnings stable?
As one of the leading Canadian telecoms, Telus also earns stable cash flows and earnings from its subscribers. It has 12.4 million total subscriber connections, including 8.5 million wireless subscribers (about a third of the market), 1.6 million high-speed Internet subscribers, and one million TV subscribers.
Businesses that are dependent on volatile commodity prices, including oil and gas producers and mining companies, will experience volatile earnings. Read More
The Big 3 Canadian telecoms, such as BCE Inc. (TSX:BCE)(NYSE:BCE), pay dividend yields of 4-5% with sustainable payout ratios. How do the telecoms differentiate from one another? Which telecom is best-valued? What about dividend growth prospects?
The telecoms, including Rogers Communications Inc. (TSX:RCI.B)(NYSE:RCI), and Telus Corporation (TSX:T)(NYSE:TU) generate stable cash flows from their operations. So, they’re great dividend investments.
BCE has increased its dividend for 7 consecutive years at a CAGR of 8.1%. It just increased its dividend in the first quarter by 5% to an annual payout of C$2.73 per share. BCE targets its free cash flow (FCF) payout ratio to be 65-75%. BCE’s free cash flow generation forecast for 2016 implies its payout ratio would be 70-76%.
Rogers has increased its dividend for 11 consecutive years. In the past 5 years, Rogers increased it at a CAGR of 8.4%. Based on its usual schedule, it was supposed to increase its dividend in the first quarter, but it has only maintained its quarterly dividend at C$0.48 per share.
Telus has increased its dividend for 12 consecutive years. In the past 5 years, Telus increased it at a CAGR of 10.9%. Based on its usual schedule, it should increase its dividend in the second quarter. This year, it plans to increase its dividend by about 10%.
Telus targets a payout ratio of 65-75%. Its quarterly payout of C$0.44 per share implies its payout ratio is about 71% based on its earnings estimates. Read More