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Dividend Investors: Lock In This 11.7% Yield by September 19

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Income investors will often hear how high-yield stocks are risky, with all of them just a minor hiccup away from slashing the generous dividend.

As is usually the case, reality is much murkier. Yes, on the whole, high dividend stocks are riskier than their lower-yielding cousins. But there are plenty of stocks that have the earning power to maintain their generous payouts. And there’s usually plenty of warning before a dividend cut. Astute investors who are paying attention can predict such an event.

Some of Canada’s top high-yield stocks have maintained their dividends for a decade or more. These management teams are going to be very defensive of such a streak.

Let’s take a closer look at one such dividend stock: a diverse fund that offers a secure payout that has been maintained at current levels since 2009.

A diverse yield machine

Canoe EIT Income Fund (TSX:EIT.UN) is one of the more interesting closed-end funds on the Toronto Stock Exchange. It’s dedicated to delivering exceptional income to investors while at least maintaining its long-term value.

It does this by implementing a few strategies. The basis of the portfolio starts with a diverse selection of top blue-chip stocks, the kind of companies you’d find in a typical dividend-growth portfolio. Next, the company uses a little debt to really maximize the equity exposure.

This is where the strategy gets a little complicated. The fund next uses a covered call method to generate huge gobs of income, which is then passed onto shareholders in the form of succulent dividends. Remember, Canoe EIT Income Fund has a current payout of 11.7%.

For a more detailed look at a covered call strategy, check out this article.

Basically, the process works like this: Canoe’s fund manager goes into the derivatives market and sells call options on stocks he already owns. This creates an obligation to sell the stock if it rises above a certain price on a set day, but in exchange for this, the fund collects the option premium immediately.

If the stock either stays at the same level or trades lower, then the fund can keep the premium and not have to take further action. Or the stock rises, which means the fund has to sell at the previously-agreed-upon price. This isn’t such a bad outcome either, since it locks in a small profit. The fund can then re-buy the stock and do it all over again.

The EIT Income Fund has been around since 2003, and it has paid the same $0.10-per-share monthly dividend since the depths of the Great Recession in 2009. It’s obvious the fund’s managers take the security of the payout seriously. And since the fund holds a diverse portfolio of stocks, I like its chances to continue uninterpreted dividends during the next downturn far more than some other stocks.

It also appears to be a good buying opportunity. The fund had consistently traded above net asset value for a few quarters, but a recent sell-off has knocked the price down to slightly below net asset value.

Lock in the payout now

Canoe EIT Income Fund declares a monthly dividend on the last business day of every month, with the distribution ending up in client accounts a couple of weeks after that.

The cutoff last month was August 21. September’s cutoff will be September 20, meaning shareholders who want to be eligible for this month’s payout must buy their shares by September 19 at the absolute latest. They’ll receive that payout sometime around Thanksgiving.

Since the fund pays out every month, it isn’t the end of the world if you wait to buy shares. But do you really want to miss out on such a sweet dividend?

And remember, shares are currently trading at close to a three-year low and below net asset value for the first time in a while. It sure looks like a buying opportunity is here.

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Fool contributor Nelson Smith has no position in any of the stocks mentioned.

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