Are the Top Five Dividend Yields of the S&P/TSX 60 Sustainable?

The S&P/TSX 60 Index is dominated by commodities producers Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG), ARC Resources Ltd. (TSX:ARX), Cenovus Energy Inc. (TSX:CVE)(NYSE:CVE) and Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK), but how sustainable are they?

| More on:
The Motley Fool

Since the oil rout triggered a range of dividend cuts across the energy patch, the top five dividend yields on the S&P/TSX 60 Index have changed markedly. Not all dividends are created equal. While investors may believe that since these companies are among the 60 largest publicly listed companies, their dividends are safe, but that it not always the case.

Let’s take a closer look at the top five to see whether they are sustainable. 

Now what?

With the exception of utility TransAlta Corp., the top five dividend yields are dominated by commodities producers.

 Company  Market Cap  Dividend Yield Payout Ratio
 Crescent Point Energy Corp.  $13B  9%  232%
 TransAlta Corp.  $3B  6%  141%
 ARC Resources Ltd.  $7B 5% 100%
 Cenovus Energy Inc. $16B  5% 108%
 Teck Resources Ltd. $10B 5% 143%

 Source data: Yahoo Finance. 

The top spot is held by Crescent Point Energy Corp. (TSX:CPG)(NYSE:CPG) and there are concerns that it won’t be able to maintain its monster yield because of the oil rout. It has hedged a considerable portion of its 2015 and 2016 oil production at an average of well above $80 per barrel. This, coupled with the financial flexibility offered by its strong balance sheet, sees the dividend remaining sustainable.

TransAlta Corp. (TSX:TA)(NYSE:TAC) has been bleeding red ink as it has battled to bring legacy transmission and power generating infrastructure up to date. However, with a strong balance sheet and recently improved financial results, the darkest days appear to be behind it. This bodes well for the sustainability of its dividend.

ARC Resources Ltd. (TSX:ARX) is another energy company that is capable of supporting its dividend yield despite the oil rout. It has a solid balance sheet that provides it with a degree of financial flexibility that many of its peers lack. This gives it some insulation from sharply lower oil prices, although that scenario could change, should they stay low for a sustained period.

Cenovus Energy Inc. (TSX:CVE)(NYSECVE) has taken a range of measures to ensure that it is capable of weathering the current storm in the oil industry. These include significantly cutting costs and shoring up its balance sheet. Significantly weak crude prices are also a boon for its refining division, which is expected to deliver better-than-expected results this year. For these reasons, I believe that its dividend is sustainable.

The final spot is held by metallurgical coal and base metals miner Teck Resources Ltd. (TSX:TCK.B)(NYSE:TCK). While it is feeling the pressure of sharply lower commodity prices because of China’s slowing economy, it still remains profitable. It also has a solid balance sheet and a high degree of liquidity. This bodes well for the sustainability of its dividend, but if commodity prices fall for a sustained period, the story could be very different.

So what?

Despite all five companies having payout ratios of 100% or greater, each of their dividends appear to be sustainable at this time, with Crescent Point offering the juiciest yield. However, it is utility TransAlta that offers the safest yield, with the other companies battling considerable headwinds generated by softer commodity prices.

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 Matt Smith has no position in any stocks mentioned.

More on Dividend Stocks

A bull and bear face off.
Dividend Stocks

The 3 TSX Stocks to Buy Before a Long-Term Bull Market Begins to Build

The TSX may not go bullish for a while, even when the economy recovers from a recession, but investors should…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

TFSA Investors: Make $200 in Monthly Passive Income With This 1 TSX Dividend Stock

Here’s an attractive dividend stock TFSA investors can buy now to earn $200 in monthly passive income.

Read more »

A plant grows from coins.
Dividend Stocks

TFSA Investors: How to Create $40,000 in Returns and Passive Income in 30 Years

If you think you'll need just $40,000 in passive income per year in retirement, your TFSA can get you there…

Read more »

stock analysis
Dividend Stocks

Buy These TSX Dividend Shares Next Week

Are you looking for dividend stocks to add to your portfolio? Buy these picks next week!

Read more »

edit Safety First illustration
Dividend Stocks

3 of the Safest Dividend Stocks in Canada

These three dividend stocks are all high-quality companies with defensive operations, making them some of the safest investments in Canada.

Read more »

A person builds a rock tower on a beach.
Dividend Stocks

3 Stocks to Anchor Your Portfolio in a Rocky Market

Three stocks are solid anchors in any portfolio today for their outperformance in a weak market and defiance of the…

Read more »

money cash dividends
Dividend Stocks

3 Solid Dividend Stocks That Cost Less Than $30

Given their solid financials and healthy cash flows, the following under-$30 dividend stocks are a good buy in this volatile…

Read more »

grow money, wealth build
Dividend Stocks

2 High-Yield Dividend Stocks With Rock-Solid Payout Ratios

These two dividend stocks offer unbelievably high yields of more than 7% and earn more than enough free cash flow…

Read more »