3 Companies That Should Raise Their Dividends

Although these situations can be frustrating, investors can at least be sure that their dividend payments can only go up.

| More on:
The Motley Fool
You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

In Canada, there are some companies that pay out too much in dividends. Usually this situation arises when a company is struggling, but is under immense pressure not to cut its payout. This can create a dangerous situation for investors, because if a dividend cut eventually does come, it can be ugly.

But the opposite situation can also come up; a company could pay out too little in dividends. This may be a little wasteful, but it’s certainly not as scary. It means that there’s practically no way the dividend will be cut, and if it is eventually raised, shareholders may benefit from both increased income and an increased stock price.

With that in mind, below are three companies that pay out too little in dividends.

1. Canadian Imperial Bank of Commerce

It may be a little unfair to call out Canadian Imperial Bank of Commerce (TSX: CM)(NYSE: CM) for paying out too little to shareholders. After all, the company just increased its dividend earlier this year, and now yields above 4%.

However, it has fewer places to reinvest its money than the other Canadian banks due to its decision to focus almost exclusively on Canada. Still, last year it paid out only 43% of its income in dividends, about in line with the other banks. Furthermore, its capital ratios are the highest in the industry. There’s no reason why it shouldn’t pay out significantly more to shareholders than its rivals do.

2. Manulife Financial

Manulife Financial (TSX: MFC)(NYSE: MFC) actually has quite a bit in common with Canadian Imperial Bank of Commerce. Canada’s largest life insurance company was burned very badly during the financial crisis, but has recovered nicely. Now, partly due to these bad memories, Manulife is taking a cautious approach, building up a very high capital ratio and paying out little in dividends.

Unlike Canadian Imperial Bank of Commerce, Manulife has more international ambitions, including a rapidly growing business in Asia. However, Manulife paid out only 32% of its income to shareholders last year. This may be why the company trades at a discount to its large peers.

3. Metro

Grocery selling is an industry where earnings are nice and stable, but growth can be hard to come by. So you would think that Metro (TSX: MRU) would have a payout ratio at least as high as the companies above. However, last year Canada’s third-largest grocer paid out less than 20% of its earnings. This makes little sense for such a consistent performer, especially one with such a strong balance sheet — its debt/equity ratio sits at a measly 0.3.

Like Canadian Imperial Bank of Commerce, Metro has recently raised its dividend, but the company still yields less than 2% and investors would certainly appreciate more of a payout. At least they don’t have to worry about the dividend being cut.

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 Benjamin Sinclair holds no positions in any of the stocks mentioned in this article.

More on Investing

Profit dial turned up to maximum
Tech Stocks

$1,000 Invested in Constellation Software Stock Would Be Worth This Much Today

Constellation Software (TSX:CSU) is trading above $2,000 today. Why this stock is so expensive, and is it worth buying?

Read more »

Dividend Stocks

Passive Income: 3 Top Canadian Stocks to Buy for Monthly Dividends

Companies such as Pembina Pipeline and Killam Apartment REIT pay investors monthly dividends, making them top bets for income-seeking investors.

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Stocks for Beginners

TFSA Investors: Top TSX Stocks to Buy With $6,000

Here are two safe, dividend-paying TSX stocks for your long-term portfolio.

Read more »

Gold medal
Investing

3 Growth Stocks That Could Be Huge Winners in the Next Decade and Beyond

Are you looking for growth stocks that could be huge winners in the next decade? Here are three top picks!

Read more »

Retirees sip their morning coffee outside.
Investing

Retirees: How to Make Over $95/Week in Passive Income TAX FREE!

Canadian retirees who are hungry for passive income should look to snag stocks like Sienna Senior Living Inc. (TSX:SIA) in…

Read more »

Man holding magnifying glass over a document
Investing

Where to Invest $500 in the TSX Right Now

Given the massive correction, long-term investors can start buying stocks like Shopify and goeasy to outpace the broader markets by…

Read more »

Aircraft wing plane
Investing

Air Canada Stock Is a Fantastic Deal Right Now

Air Canada (TSX:AC) is a great stock to own, as market fear turns into hope amid falling recession fears.

Read more »

Pixelated acronym REIT made from cubes, mosaic pattern
Investing

Beginner Investors: Get Passive Income by Investing in REITs!

You can get passive income by investing in REITs like Northwest Healthcare Properties REIT (TSX:NWH.UN).

Read more »