Investors in search of high-yielding stocks have many opportunities knocking on their doors after the recent market pullback. But when you make a decision to purchase a high yielder, you need to make sure you’re not catching a falling knife.
Let’s have a look at Laurentian Bank of Canada (TSX:LB) and First National Financial Corp. (TSX:FN) stocks to see if their high dividend yields are safe and if they fit into your investing style.
Laurentian Bank
Montreal-based Laurentian Bank stock has been under pressure this year. The main drag on this lender’s share price came from a disclosure with its fourth-quarter earnings that an internal audit found “documentation issues and client misrepresentations” on some mortgages it had sold to a third-party company.
Since then, its stock has been underperforming the broader market, as investors remain concerned about the total amount of “mis-flagged” mortgages and their potential impact on the bank’s earnings.
But I think Laurentian Bank’s mortgage problems are contained, and the lender has been very up front about resolving the issue. The lender later repurchased $180 million of problematic mortgages it identified late last year, while increasing the total target for its buybacks to ~$392 million.
The estimated value of the mortgages that may be repurchased from the third-party purchaser constitutes approximately 1.6% of the bank’s total residential mortgage portfolio and less than 1% of its total loan portfolio, the bank clarified in a statement in December.
I think this problem will linger for a couple more quarters and will keep its share price depressed, but its 4.87% dividend yield is good enough for me to stomach the risk for a company which has a +170-year history, a solid balance sheet, and a healthy loan portfolio. The bank pays a quarterly payout of $0.63, which has increased with a compounded annual growth rate of about 6% during the past five years.
First National Financial
First National is another financial stock that offers a high dividend yield. With more than $100 billion in mortgages under administration, First National is Canada’s largest non-bank originator and underwriter of mortgages.
With a dividend yield of 6.4%, First National stock pays $0.154 a share monthly dividend, which comes to $1.8 on yearly basis.
Some investors are avoiding non-bank lenders in Canada after last year’s problems at Home Capital Group Inc. (TSX:HCG), which emerged from a near-bankruptcy situation after Warren Buffett’s investment firm provided a lifeline.
Trading at $28.83, First National shares have not moved much during the past one year, as investors remained focused on Canada’s housing market, which is coming under tighter regulations and showing signs of a slowdown.
With a price-to-earnings ratio of just seven, I think FN stock offers a great value to long-term investors. Last year, the company paid its investors a special dividend. With a compounded annual growth rate of 7.3%, First National’s dividend-growth rate is solid and tempting for buy-and-hold investors.
Which stock is better?
I think both stocks are good and safe picks to earn higher returns. Their stocks are trading at attractive levels with potential to grow. Long-term investors can lock in their above-average yields.
