For income investors, it’s tempting to give yourself a raise by investing in stocks with artificially high yields. Such stocks have been beaten up so badly over the years such that their yields have surged to a level that’s substantially higher than the average dividend stock.
For retirees, such stocks are dangerous, as they have an above average risk of experiencing a dividend cut over the medium term. The only reason a particular stock has a yield that’s north of 8% is that the management team has refused to cut the dividend, even though it may be in the company’s best interest. The capital could be used to finance turnaround efforts, although usually with such artificially high-yielding stocks, you’re looking at a management team that’s shareholder-friendly (likely too shareholder-friendly for their own good).
If you’re not a retiree and you can afford to take on the added risk that comes with investing in artificially high-yielding stocks, here are two top-notch Canadian picks that could offer huge total returns in the event of a turnaround.
Alaris Royalty Corp. (TSX:AD)
Alaris shares have been on a downward roller coaster ride for over four years, and are now down ~44% from all-time highs. With a 7.84% dividend yield and a stretched payout ratio, many investors are wondering whether Alaris presents a compelling opportunity to lock in a sky-high dividend yield to go with a potential rally.
Fellow Fool contributor Will Ashworth noted that Alaris is in much better shape than it was five years ago because of changes in its capital structure. With extremely high-yielding stocks, many investors tend to focus on a company’s payout ratio, but Ashworth is urging investors to look beyond the current payout ratio and focus on the longer-term picture, which certainly has the potential to be a lot brighter.
No, Alaris doesn’t have the safest dividend in the world, but given management’s recent efforts to become a more robust business going forward, I think this high-risk income investment has the potential for even larger long-term rewards. Not only could you stand to benefit from a rally, but you’d lock in a whopper dividend yield, which could bring your long-term total returns through the roof.
Corus Entertainment Inc. (TSX: CJR.B)
Corus is a Canadian media firm that’s down over 55% from its all-time highs after falling off a cliff in late 2014. The stock now has an astounding 9.74% yield, which looks like it could be cut any day now.
Management appears to be stubborn when it comes to the dividend, so much so that I think the general public is already expecting a major cut that’ll happen at some point over the medium term. The pessimism is so great that investors can buy the stock today; if the dividend is cut, the stock may rally as the company puts its cash to better use in order to emerge from its funk.
For now, it looks like the dividend will stay static, as management has been continuing to chip away at its debt. According to fellow Fool contributor Chris MacDonald, Corus has an unused $300 million credit facility, which will allow Corus to keep up with its dividend payments over the short term.
Corus is a compelling deep-value bet for the most aggressive of contrarian income investors. The near 10% yield isn’t rock-solid, but I think it’s one of the safest you’ll find if a sky-high yield is what you’re looking for.
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