Over the past few years, big dividends have become harder to find. The reason is quite simple: dividend stocks have become very popular, which drives up their prices. As a result, dividend yields shrink.
In response, many investors are taking bigger risks to satisfy their thirst for yield. A perfect case in point is Canada’s energy sector, which features many big dividend payers. Unfortunately, this is not a place you should be looking for yield. After all, investing in these types of names defeats the very purpose of dividend investing, which is to collect regular income that can be relied upon.
On that note, below we take a look at two big yielders that should be avoided at all costs.
1. Crescent Point
Crescent Point Energy Corp. (TSX: CPG)(NYSE: CPG) has one of the highest-yielding dividends in the S&P/TSX 60 index, currently yielding 7.5%. As a result, many investors own the company simply for the monthly income. But this is not a wise thing to do.
The reason is quite simple: Crescent Point does not make enough money to pay its dividend in cash. Instead, the company offers shareholders a 5% incentive to receive their payout in additional shares (about 30% of shareholders take the offer). This creates a host problems.
First of all, it means that Crescent Point has a consistently increasing share count. To illustrate, the company had over 440 million shares outstanding at the end of September. Three years ago, that number was about 285 million. This makes the dividend increasingly costly for Crescent Point to pay. So it should surprise no one that the dividend hasn’t gone up since 2008.
Worst of all, lower oil prices could seriously hurt the company, and investors now have to wonder if a dividend cut is coming.
2. Penn West
Penn West has been a poster child for everything wrong with Canada’s energy sector. The company expanded at the wrong time, and ended up with an overleveraged balance sheet. Asset sales followed, some of which came at bargain prices. Making matters worse, an accounting scandal surfaced this year, which required $400 million worth of restatements. And most recently, low energy prices have put the company under further pressure.
Granted, the company could turn around. But this is not a bet for dividend investors to make. Your best bet is to avoid the stock. It should make sleeping at night easier.
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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.