Don’t you feel like it’s a dividend desert out there?
Savings accounts pay next to nothing. Interest rates are nearly zero. And the average yield for all stocks in the S&P/TSX Composite Index (TSX: ^OSPTX) is a measly 2.5%. It’s almost impossible for anyone to generate a comfortable income from their portfolio.
However, you can still find plenty of great yields if you’re willing to shop around. In spite of the current low interest rate environment, there are plenty of stocks that offer safe and reliable dividends.
Of course, investing in high-yield stocks entails a certain amount of risk. But this can be mitigated by buying at attractive prices and assessing the strength of the underlying business. Here are three ideas to get started.
1. Earn a 6.8% dividend yield from North America’s oil boom
Over the past decade, Crescent Point (TSX: CPG)(NYSE: CPG) has been one of the top performers in the Canadian oil patch. Through a series of brilliant acquisitions, Chief Executive Scott Saxburg has collected a remarkable set of light-oil assets throughout Saskatchewan, Utah, and North Dakota. And since its inception, Crescent Point has grown reserves and production at a 18% and 7% annual clip, respectively.
Yet Crescent Point’s best days might still be ahead of it. Throughout the Bakken, operators have started experimenting with waterflooding — the process of pumping water into declining wells in order to boost production. In the Bakken, waterflooding has doubled the recovery factor of its tight oil wells to as high as 30%. Results have been so impressive that management raised full-year operating guidance.
Sustaining the generous 6.8% dividend yield likely won’t be a problem. The company has ample financial flexibility given that it generates a dollar in cash flow for every dollar of debt on the books. If Crescent can continue its expansion, production growth should provide plenty of room for dividend hikes in the future.
2. Collect a 7.1% yield from this beaten-down telecom
Halifax-based Bell Aliant (TSX: BA) provides telephone, Internet, and TV services to more than 5 million customers in the Maritimes and rural regions of Quebec and Ontario. While the telecom sector is prized for its high distribution, Bell Aliant is the tallest of them all yielding a tasty 7.1%.
The question is whether this distribution is safe. Lacking much of a wireless business, the company’s best hope of offsetting its declining land line business is the roll-out of its high-speed fibre optic network. Early numbers have been encouraging. By the end of the year, FibreOP’s coverage area extended to 806,000 homes, handily beating management’s initial projections. Of the homes that can access the service, about 22% and 20% have signed up for high-margin internet and television services respectively.
Bell Aliant still sees plenty of opportunity to add more customers in existing FibreOP territories. With the company’s expansion plans paying off, that juicy yield may be sustainable.
3. Earn a 7.7% yield from this office REIT
Dundee REIT (TSX: D.UN) is Canada’s top commercial real estate investment trust. Its portfolio comprises office properties in cities across the country leased out to high-quality tenants such as the government of Canada, Telus, Bank of Nova Scotia, and Enbridge.
It turns out that the government and blue-chip companies rarely bounce a rent check. And these types of tenants tend to look for stable, long-term leases. And as it turns out, this business is quite profitable. Dundee throws off ample cash flow, which translates into a rock-solid 7.7% dividend yield for investors.
Dundee REIT is also attractive because it’s managed Chief Executive Michael Cooper — widely regarded as one of the best capital allocators in the business. After starting the firm in 1993, Cooper has grown Dundee from a small Saskatchewan landholding company into the real estate power player while rewarding shareholders nicely in the process.
Foolish bottom line
Never buy a stock based only on its high yield. In order for the payout to be sustainable, companies need strong fundamentals and have a growth channel available. These three stocks may just be able to pull it off.
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 Robert Baillieul has no positions in any of the companies mentioned in this article.