Income Investors: Get a 7.5% Yield From Shaw Communications Inc.

If you venture away from Shaw Communications Inc. (TSX:SJR.B)(NYSE:SJR) common shares, there’s a very attractive dividend with the preferred shares.

| More on:
The Motley Fool

For many investors, getting the best possible yield today is paramount. This is especially true for folks who are retired.

In today’s world of low interest rates, it’s tougher and tougher to get secure income. Investors have gone to the stock market as a result, ready to take on a little risk in exchange for dividends that are much more generous than yields on GICs or government bonds.

One such stock is Shaw Communications Inc. (TSX:SJR.B)(NYSE:SJR). Investors especially like the stickiness of the company’s revenue. Things like Internet, cable, and home phone are about as dependable as businesses get. Yes, there is a slow decline in both the television and home phone businesses, but they’ve been largely offset by increases in Internet subscribers, an increase in services to business, and pushing price increases to existing customers.

Plus, Shaw is still posting decent numbers. It recently posted full-year 2015 numbers, which featured revenue that went up 4.7% and net profit which was largely flat compared with the year before, but would have been up without one-time charges.

And most importantly for dividend investors, it showed that the dividend is still very sustainable. Over the year, Shaw paid $1.14 per share in dividends, while earning $1.79. That’s a payout ratio of just under 64%, which is relatively low for a stock that currently yields 4.3%.

But what if there was a way you could increase your income from Shaw, collecting a 7.5% yield for the next eight months and then a decent yield afterwards?

It’s easy. That’s exactly the situation investors are getting with Shaw preferred shares.

Prefer the preferred

The Shaw preferred shares (ticker symbol SJR.PR.A) are relatively simple. They’re called rate reset preferreds, which means on June 30th, 2016, they’ll reset to an interest rate of the Government of Canada three-month Treasury bill rate, plus 2%. Based on the original $25 issue price, that works out to a yield of approximately 2.4%.

But these shares are far under the issue price. They currently trade hands for just $14.67, a full 41% below the $25 per share par value. Which means you’re looking at a 4.3% yield going forward if interest rates stay where they are today.

If the common shares yield 4.3% and have a history of growing the payout by 5% or so, why would the preferred shares at the same yield be a better deal?

Firstly, you get a very attractive yield for the next eight months. The yield offered for the next three quarterly payments is 7.5%, enough to push the average yield for the whole investment up to 5.4% over three years. That easily beats the dividend for the common shares.

Secondly, these preferred shares offer protection against rising rates. If the Federal Reserve or Bank of Canada hikes rates between now and mid-2016, the rate for Treasury bills will go up, which will increase the yield for these shares.

And finally, there’s the interesting option offered every five years. In 2016 and every five years after that, Shaw has the option to redeem these shares at the full $25 per share par value. A redemption looks very unlikely in 2016, because these shares are a very cheap form of capital. But in five more years, who knows. The company redeeming the shares would be a nice capital gain to go along with a decent income choice.

There’s also the ability to trade these shares. If you can get a dividend yield of 5.4% over three years and then be up 10% on the value of the preferred shares, that’s a very solid overall return, especially for a product designed to be less risky than other income options.

Ultimately, the real value in these shares is the attractive dividend over the next eight months. Getting 7.5% annualized is nothing to sneeze at, especially in a company that’s as secure as Shaw Communications. It doesn’t quite compare to GICs in terms of risk profile, but it’s pretty darn close.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith owns Shaw Communications preferred shares.

More on Dividend Stocks

Two seniors float in a pool.
Dividend Stocks

TFSA: How to Earn $1,890 in Annual Tax-Free Income

Plunk these investments into your TFSA to earn passive income and avoid the taxman.

Read more »

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »