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…
To keep reading, enter your email address or login below.
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.
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.
5 stocks we like better than Home Capital Group
When investing Guru Iain Butler and his shrewd team of analysts have a stock tip, it can pay to listen. After all, the newsletter they began just three years ago, Stock Advisor Canada, is already beating the market by 9.6%. And their Canadian picks have literally doubled the market.
Iain and his team just revealed what they believe are the five best stocks for investors to buy right now... and [stock] wasn't one of them! That's right - they think these five stocks are even better buys.
*returns as of 5/30/17
Fool contributor Haris Anwar has no position in any stocks mentioned.