Don’t Take the Dividend Bait: Avoid TransAlta Corporation, Lightstream Resources Ltd., and BCE Inc.

TransAlta Corp. (TSX:TA)(NYSE:TAC), Lightstream Resources Ltd. (TSX:LTS), and BCE Inc. (TSX:BCE)(NYSE:BCE) all have big dividends, but you should stay away.

| More on:
The Motley Fool

In Canada, it’s not too difficult to find stocks with a big yield. In fact, they’re seemingly everywhere. But not all of these dividends are worth pursuing. In fact, many of them are simply unsustainable.

With that in mind, here are three companies with big dividend yields that you should be avoiding.

1. TransAlta Corporation

It’s sure been a rough ride for shareholders of TransAlta Corporation (TSX: TA)(NYSE: TAC), with the shares down by about 50% over the past three years. This is particularly worrying for a utility, a sector most often considered stable.

And if there was any confusion, CEO Dawn Farrell cleared it up, by saying some investors see the company as a “utility with predictable, regulated assets, when it’s not.” Investors should certainly believe this statement — to illustrate, earnings before interest, taxes, depreciation and amortization dropped by 95% in the most recent quarter from a year ago.

Making matters worse, TransAlta has a very scary balance sheet, with $4 billion in debt. And it makes most of its money from coal, which could spell big trouble. So is this really what you want from a dividend investment? If not, you should stay away from this 6.1% yield.

2. Lightstream Resources Ltd.

While TranAlta shareholders have done poorly, the news has been even worse for Lightstream Resources Ltd. (TSX: LTS), whose shares are down by about half since June. Part of this drop is due to falling production guidance. But there are also signs the company is turning itself around — for example, the company recently closed a $378 million asset sale to Crescent Point Energy Corp. The funds will likely be used to pay down debt.

Lightstream also looks tempting because of its dividend, which currently yields a staggering 10.4%, even after a 50% cut in November of last year. But don’t be tempted; the company cannot come close to affording this dividend, with negative earnings, negative free cash flow, and $2 billion in debt.

Granted, this stock could skyrocket if the company turns around successfully. But this kind of bet isn’t suitable for a dividend portfolio.

3. BCE Inc.

One must admit it’s a little unfair to include BCE Inc. (TSX: BCE)(NYSE: BCE) in a list with TransAlta and Lightstream. But this is still a dividend you should stay away from, despite its 5.2% yield.

There are a couple of reasons for this. For one, the company has very few growth prospects. It has not been adding wireless customers fast enough to offset the decline of its landline business, and for that reason its subscriber count is slowly dwindling. New government regulations, such as the one eliminating three-year contracts, are also creating a headwind.

Secondly, BCE trades at a stiff 18 times earnings, which is higher than its two big competitors. So while you’re unlikely to face a dividend cut, this stock offers very little other than its payout.

BCE is certainly the best dividend stock in this list. But there are still better options. Three are profiled in the report below.

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 has no position in any stocks mentioned.

More on Dividend Stocks

food restaurants
Dividend Stocks

Better Stock to Buy Now: Tim Hortons or Starbucks?

Starbucks and Restaurant Brands International are two blue-chip dividend stocks that trade at a discount to consensus price targets.

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

1 Growth Stock With Legit Potential to Outperform the Market

Identifying the stocks that have outperformed the market (in the past) is relatively easy, but selecting the ones that will…

Read more »

money cash dividends
Dividend Stocks

Passive Income: The Investment Needed to Yield $1,000 Per Annum

Do you want to generate a juicy passive-income stream? Here's a trio of stocks that can generate a yield of…

Read more »

Shopping card with boxes labelled REITs, ETFs, Bonds, Stocks
Dividend Stocks

Invest $10,000 in This Dividend Stock for $1,500.50 in Passive Income

If you have $10,000 to invest, then you likely want a core asset you can set and forget. Which is…

Read more »

Dividend Stocks

Here’s the Average TFSA Balance in 2024

The average TFSA balance has steadily risen over the last six years and surpassed $41,510 in 2023. Will the TFSA…

Read more »

potted green plant grows up in arrow shape
Dividend Stocks

TFSA Set and Forget: 2 Dividend-Growth Superstars for the Long Run

I'd look to buy and forget CN Rail (TSX:CNR) and another Canadian dividend-growth sensation for decades at a time.

Read more »

Caution, careful
Dividend Stocks

Here’s Why I Wouldn’t Touch This TSX Stock With a 50-Foot Pole

This TSX stock has seen shares rise higher, with demand for oil increasing, and yet the company could be in…

Read more »

Payday ringed on a calendar
Dividend Stocks

1 Passive-Income Stream and 1 Dividend Stock for $781.48 in Monthly Cash

Looking for passive income? Don't take out a loan with that high interest involved. Instead, consider this method for years…

Read more »