“Bulls make money. Bears make money. But pigs get slaughtered.” I’m not exactly sure who first came up with the quote above, but dividend investors can learn a lot from it. Throughout the years, whenever dividend investors have bet the farm on stocks with huge yields, more often than not it has come back to bite them. The examples are too numerous to mention, but typically, buying the highest-yielding stocks on the TSX Composite (TSX: ^OSPTX) hasn’t been a very profitable move. Sure, it’s generally great in the short term. Even a company on its last legs can delude investors…
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“Bulls make money. Bears make money. But pigs get slaughtered.”
I’m not exactly sure who first came up with the quote above, but dividend investors can learn a lot from it.
Throughout the years, whenever dividend investors have bet the farm on stocks with huge yields, more often than not it has come back to bite them. The examples are too numerous to mention, but typically, buying the highest-yielding stocks on the TSX Composite (TSX: ^OSPTX) hasn’t been a very profitable move.
Sure, it’s generally great in the short term. Even a company on its last legs can delude investors into thinking that recovery is just around the corner. As long as that juicy quarterly payout keeps coming, investors are happy. It’s all great until it isn’t, and the company is forced to cut the dividend. Suddenly, the share price has lost anywhere from 10%-50%. It takes a lot of dividends to make up for something like that.
It’s not easy, but it’s possible for investors to find stocks that have both a high yield and a stable payout. Typically, that type of investment won’t come with much growth, but generally, investors who are looking for a high current yield are more interested in money today, not in the future.
Here are three names that should be on your watch list if high, sustainable yield is what you’re after.
1. Dream Office REIT
One of the main things investors should look for when buying any company is finding one of the best in the sector. If you can buy it at a discount, all the better. Dream Office REIT (TSX: D.UN) meets both these criteria.
The company is one of Canada’s largest owners of office buildings. It focuses on both Calgary and Toronto, two cities with long-term fundamental strength. Collectively, the company owns more than 180 office buildings and more than 20 million square feet worth of space. Its largest tenants include some of Canada’s most prestigious companies, along with various levels of government. These are the kinds of tenants you want to have.
Thanks to a few minor operational issues, shares haven’t really recovered with the rest of the sector. This means investors have the chance to buy a great operator with solid assets, all while getting a 7.6% yield.
2. Canadian Oil Sands
As much as it makes the environmentalist inside all of us shudder, the fact is that sustainable oil sources from friendly nations are very important. Dividend investors looking to take advantage of this trend should check out Canadian Oil Sands (TSX: COS) and its 5.9% dividend.
The company is happy to continue operations at its Syncrude facility in the oil sands, content to churn out approximately 300,000 barrels of oil per day. Since there isn’t a lot of capital reinvestment or exploration for new reserves going on, the company is free to reward investors with a generous yield.
Investors needn’t worry about the fields running dry any time soon. The company figures it has enough in reserves to keep current production going until at least 2050.
Another thing important for investors looking for large yields is the growth potential of the overall sector. Does the whole sector appear to be growing, or is it a dying industry? When it comes to Extendicare (TSX: EXE), one of Canada’s largest retirement home operators, it’s easy to see demographics working in the company’s favor.
Close to 10 million Canadians are on the verge of retirement. Plus, many seniors are living longer than ever, meaning more potential paying customers. This will ensure that the company stays busy for years.
The company has faltered a bit over the past few years, even going as far as cutting its dividend. This is good news for investors looking to get into the stock now, since I assume management has learned to keep the payout at a more sustainable level. The 6.5% dividend is easily covered by operating income, and investors should be able to count on increases at some point in the future.
1 more stock with a nice dividend!
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Fool contributor Nelson Smith has no position in any stocks mentioned.