Some investors simply refuse to buy stocks with yields over some arbitrary number, claiming those payouts are unsafe.
Nothing could be further from the truth. Sure, some high yields are risky. Any stock yielding more than 10%, for example, is likely at risk of cutting its dividend. But most stocks yielding between 5% and 8% have sustainable payouts. This is easily verified by checking the underlying earnings.
Some of these higher yielding stocks not only offer good payouts, but they also have solid growth potential and trade at compelling valuations. Others are riding a secular trend that should lift all boats. In other words, they’re not the prototypical boring no-growth income play investors have come to expect from the high yield sector.
Let’s take a closer look at three interesting dividend stocks, each with an attractive payout and much more.
Crombie
Crombie Real Estate Investment Trust (TSX: CRR.UN) is one of Canada’s largest owners of retail space. The company owns 289 properties consisting of 18.8 million square feet of gross leasable area. Crombie focuses on grocery-anchored retail space with Empire Company’s chains — Safeway and Sobeys, primarily — renting the majority of the space.
Crombie, like many of its peers, wants to be more than a retail story. The company is in the early innings of an ambitious growth project that will see various locations across the country converted from retail-only spaces into mixed-use facilities, combining retail with apartments or offices on top. Since the underlying land was paid for decades ago, Crombie’s developments immediately offer attractive rates of return.
While we wait for the new developments to really impact the bottom line, Crombie shareholders get to enjoy an attractive 6.5% dividend, a payout that comes in at under 90% of adjusted funds from operations. That’s a standard payout ratio for REITs, and investors don’t have to worry about the security of the distribution.
First National
First National Financial Corp (TSX: FN) is Canada’s largest non-bank mortgage lender with more than $100 billion lent out to Canadian homeowners across the country.
The company gets business by working exclusively through mortgage brokers and routing all applications through a handful of regional offices, allowing it to offer borrowers competitive pricing while keeping its broker partners happy. Many brokers won’t send a client to certain financial institutions because they’re afraid the lender will aggressively push other products on the borrower.
First National has been a solid growth story even during periods of weakness for real estate in general. Earnings per share have increased from $1.10 in 2011 to $2.95 in its most recent 12 months. Originations are down over the near term, but the company still gets solid earnings from servicing existing loans.
The stock pays out a 6.5% dividend, a payout that’s about as safe as you’ll find for such a high yield. The dividend has been raised each year since 2012 and 2018’s full-year payout ratio should be under 60%.
Inter Pipeline
Inter Pipeline Ltd. (TSX:IPL), one of Canada’s largest pipeline companies, has been hit hard recently by the woes affecting Alberta’s energy sector. It’s the perfect opportunity for long-term investors to pick up beaten-up shares.
The company’s long-term growth story has been impressive. It spent aggressively to build new pipelines to the oil sands, and has also expanded into Europe. And management is busy spending some $3.5 billion on the Heartland Petrochemical Complex, a facility that will turn propane into polypropylene, a chemical used in the manufacturing of chairs, medical equipment, and clothing, among other uses. Heartland is projected to add $500 million in annual EBITDA to Inter Pipeline’s bottom line starting in 2021.
Not only does Inter Pipeline offer an excellent 8% current yield, but it also can boast about its exceptional dividend growth history. It has increased its payout each year for the past decade and has averaged a 5.3% growth rate over the last five years. If it can maintain that dividend growth over the next five years, investors who get in today will be looking at a 10.3% yield on cost in 2024.
