The stock market is serving up a plethora of juicy dividends these days, but income investors have to be careful when chasing big yield, especially if the distributions are needed to supplement income.
As a rule, it is wise to stay away from anything that is paying 8% or more because the market is pretty much pricing in a dividend cut once the yield reaches that point.
This doesn’t mean a stock that offers a yield of 10% will definitely slash its payout, but the risk of a reduction is certainly elevated.
With the conservative yield seeker in mind, I think investors should consider adding RioCan Real Estate Investment Trust (TSX:REI.UN) and BCE Inc. (TSX:BCE)(NYSE:BCE) to their income portfolios for 2016.
RioCan
The REIT sector has been under pressure for the past six months and RioCan has certainly felt its share of the pain, but I think the pullback is overdone.
The market is concerned that an increase in U.S. interest rates is going to hit the REITs hard. On top of that, the weakening Canadian economy has investors concerned that commercial real estate is going to take a hit.
The interest rate moves are expected to be small and drawn out, so that risk should be very manageable.
As for the economic headwinds, some REITs are certainly looking at difficult times, especially those with large exposure to Alberta’s energy companies. REITs that focus exclusively on office space might also feel some heat if the woes in the west spread across the country next year.
RioCan’s specialty is retail properties.
These shopping centres are located in prime locations and have large, successful companies as anchor tenants. A slowdown in the economy will certainly put a dent in consumer spending, but RioCan’s prime customers tend to be grocery stores, pharmacies, discount retailers, and companies that sell the household goods that people need on a regular basis.
Those businesses tend to hold up well in a recession.
RioCan continues to bring in solid cash flow and recently launched a new plan to add residential space to some of its best locations. That project could boost revenues significantly in the next few years.
The company brought in $140.2 million, or $0.44 per unit, in Q3 2015 funds from operations, up 5% and 1% respectively when compared with the same period last year.
RioCan pays a monthly distribution of 11.75 cents that yields about 5.7%. The cash flow easily covers the distribution and investors could see a nice pop in the unit price if the residential project is successful.
BCE
BCE holds a dominant position in an industry with few serious competitors. That might not be great for consumers, but it is wonderful for shareholders.
The company has done a good job of acquiring strategic assets along the media and communications value chain and is positioned well to profit from the rapid growth in demand for high-speed data.
Net earnings for Q3 2015 came in at $739 million, up 23% from the same period in 2014.
Things are rolling along nicely, but BCE continues to invest. The company plans to spend up to $20 billion over the next five years on its network infrastructure, including the rollout of its popular fibre-to-the-home initiative.
With a capital plan of that magnitude, one might think there wouldn’t be any money left for shareholders, but BCE still hands out a significant part of the profits.
The company pays a quarterly dividend of $0.65 per share that yields about 4.6%. As free cash flow rises, investors should see regular increases to the distribution.
