Canadians are searching for good dividend yields from top-rated companies.
Let’s take a look at Potash Corporation of Saskatchewan Inc. (TSX:POT)(NYSE:POT) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) to see if one is a better choice right now.
Potash Corp.
Battles for market share, a drought in India, and volatile currencies have combined to create a perfect storm in the global potash market.
As a result, potash prices have crashed in recent years, and Potash Corp. is feeling the pain.
The company reported Q1 2016 earnings of US$75 million, or about $0.09 per share. That’s a steep decline from the US$370 million, or US$0.44 per share, it earned in Q1 last year.
Ongoing market challenges forced management to lower guidance for 2016 to US$0.60-0.80 per share, and recent developments suggest the target could come down again when the Q2 numbers are released on July 28.
India and China have finally signed new supply deals at US$227 and US$219 per tonne, respectively. These prices are significantly below the US$332 and US$315 the countries paid in 2015.
The deals generally set a benchmark for the rest of the world, so prices are expected to remain under pressure for the medium term.
In an effort to adjust to the current conditions, Potash Corp. has reduced output and slashed its dividend. The current annualized payout of US$1 per share is probably not sustainable, so investors shouldn’t get too excited about the 5.8% yield.
TD
TD is probably the most conservative pick among the Canadian banks. The company gets the majority of its revenue from retail operations and has a large U.S. division that provides a nice hedge against some of the headwinds in the Canadian economy.
Investors are concerned a tidal wave of mortgage defaults could hit the Canadian banks in the coming years. A sharp decline in the housing market over a very short period of time would definitely cause trouble, but most analysts are calling for a gradual slowdown.
TD finished fiscal Q2 2016 with $248 billion in Canadian residential mortgages. That’s a hefty sum, but 53% of the loans are insured and the loan-to-value (LTV) ratio on the rest is 58%. This means a decline would have to be significant before TD sees any material damage.
The company raised the dividend by 8% earlier this year, so management doesn’t appear to be overly concerned about profit growth. At the moment, TD offers a yield of 3.9%.
Which should you buy?
Dividend investors should stick with TD. The bank’s payout is safe, and shareholders should see the distribution continue to rise at a steady pace.
Potash Corp. might be an attractive contrarian play, but I would avoid the stock if you are looking for reliable yield.
