How to Strategically Use High-Income Stocks

Buy high-income stocks, such as Alaris Royalty Corp. (TSX:AD), when they’re reasonably priced and reinvest them for high growth.

| More on:
The Motley Fool

High-income stocks pay above-average yields compared to the market. The iShares S&P/TSX 60 Index Fund (TSX:XIU), which represents the Canadian market, yields 3.04%. So, a high-income stock would be one that yields 1.5 times higher than that yield–a yield of 4.56% or higher.

The strategy

Before buying high-income stocks, it should be determined that their high yields are safe. Otherwise, the strategy will break apart.

The total return of an investment consists of capital gains and dividends. Capital gains aren’t realized until you sell. By pocketing a high income, investors can use that cash to invest in high-growth companies, such as Facebook Inc. and Alphabet Inc.

Over the long term, share prices will head higher if businesses become more profitable over time. On the other hand, dividends are paid out from cash flows or earnings. So, companies with stable, growing earnings and cash flows are best for a high-income strategy.

By buying high-income stocks when they’re priced reasonably or, even better, at discounts, investors can hold on to the shares forever to boost their cash flows.

Alaris Royalty

Alaris Royalty Corp. (TSX:AD) provides cash financing to North American private businesses with proven track records of stability and profitability in changing economic environments. Alaris partners with these businesses for the long term. In exchange, it receives monthly cash contributions from them.

Every year these distributions are adjusted based on the year-over-year percentage change in a top-line performance metric, such as net sales, gross profit, or same-location sales. If these businesses do well, so will Alaris.

In March, Alaris’s cash flow is sourced from 16 revenue streams. However, the top two sources contribute 30.6% of its revenue streams; 67% of the revenue stream is from the U.S., while 33% is from Canada. So, Alaris also benefits from a strong U.S. dollar.

Alaris has raised its dividend for eight consecutive years. In the past five years, it averaged dividend increases of 10.6% per year. Its dividend is 8% higher than it was a year ago.

At under $29 per share, Alaris Royalty yields 5.6% with a payout ratio of about 88%. Historically, its partner revenues have experienced organic growth of 1-5% per year. This implies a total return of 6.6-11.6%, and investors can also expect its dividend to grow at least 1-5% per year.

Other sources of high income

Real estate investment trusts (REITs) collect rental income from the many properties they own, operate, and manage. Many REITs generate high income of over 8%.

For example, Slate Office REIT (TSX:SOT.UN) invests in non-trophy Canadian office properties, which it finds more attractive than trophy assets.

It yields a juicy 9.5%! It last reported a payout ratio of 96% in the fourth quarter of 2015, which was a big improvement from its 2014 payout ratio of 124%.


By holding a basket of safe, high-income companies, investors can use that income to invest for high growth. Ensure that you buy high-yielding companies when they’re priced at reasonable valuations because the higher their yields, the slower they tend to grow.

Alaris is a stronger buy at the $26 level or lower, and Slate is a stronger buy when it’s close to $7.

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 Kay Ng owns shares of Facebook and SLATE OFFICE REIT. David Gardner owns shares of Alphabet (A shares), Alphabet (C shares), and Facebook. Tom Gardner owns shares of Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool owns shares of Alphabet (A shares), Alphabet (C shares), and Facebook.

More on Dividend Stocks

A tractor harvests lentils.
Dividend Stocks

Why Nutrien Stock Is Still a Great Buy on the TSX Today

Nutrien (TSX:NTR) stock has gone through major ups and downs thanks to outside influences, but its bottom line remains incredibly…

Read more »

Businessperson's Hand Putting Coin In Piggybank
Dividend Stocks

Build Your Retirement Fortune With These Top TFSA Stocks

Here are two top Canadian dividend stocks you can add to your TFSA to build wealth for retirement.

Read more »

Path to retirement
Dividend Stocks

Invest in These Stocks for a Worry-free Retirement Income Stream

Are you looking for an income stream that can pay you throughout your retirement? Then invest a portion of your…

Read more »

Dividend Stocks

Is BCE Stock Still a Top Telecom Investment in Canada?

Canada’s telecoms can provide growth and income in a defensive shell. Let’s see if BCE is still a top telecom…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

2 Canadian Dividend Stocks I’ll Be Buying Hand Over Fist in June 2023

These two beaten-down Canadian dividend stocks could help you earn handsome returns on your investment in the long term if…

Read more »

edit Close-up Of A Piggybank With Eyeglasses And Calculator On Desk
Dividend Stocks

If You’d Invested $10,000 in Loblaw Stock in 2012, Here’s How Much You’d Have Today

Loblaw stock had a crazy decade, with many huge moves. This could have created wealth from a $10,000 investment, but…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Passive Income: How to Make $90 Per Month Tax Free

You can add this amazing Canadian monthly dividend stock to your TFSA now to generate $90 in tax-free monthly passive…

Read more »

A golden egg in a nest
Dividend Stocks

Investing for Retirement? Check Out These Dividend-Paying Stocks in Canada

Dividend-paying stocks like First National Financial are on sale in June 2023.

Read more »