When looking for stocks to provide income, it’s common for investors to be drawn to the highest dividends. After all, who isn’t attracted to payouts of about 10% on their investment?
Investors should be cautioned, though, that chasing high yields is one of the most dangerous mistakes investors can make.
Stocks that have high yields have been priced like that by the market for a reason. The most common rule of thumb is, the higher the dividend, the more likely it is that it’s unsustainable.
If a company were able to pay out an amount that equalled 10% a year, and it was completely stable, given the other investments available in the market, investors would flock to this new stock driving the share price up and the yield down, until it was more in line with similar stocks of its nature.
Therefore, it’s clear that once you are looking at high-yield stocks, the risk increases substantially.
Investors who are not careful are at risk of huge capital losses on their principal investment, much greater than even the 10% you would have been paid back in year one.
This is why it’s so important to be careful when investing in high-yield stocks and why you should do your maximum due diligence — to do all that is possible to prevent an investment in a potentially unstable dividend.
To be clear, not all high-yielding stocks are going to have to cut their dividends, but the risk is much higher.
It’s recommended that investors find solid companies whose dividends are a lot more stable. The yield you receive will be slightly less to discount for the increased safety; however, if you find great companies that increase the dividends often, soon enough, your initial investment will yield a lot higher returns.
One company that has growing operations and still pays a decent dividend that is highly stable is CT Real Estate Investment Trust (TSX: CRT.UN).
CT REIT
CT REIT is the real estate investment trust that primarily owns the land and buildings that Canadian Tire leases. More than 90% of rent comes from Canadian Tire’s stores. In total, it has 345 properties totalling 27.1 million square feet of gross leasable area. It has locations in 10 provinces and two territories.
CT REIT has impressive numbers. It has a five-year compounded annual growth rate in adjusted funds from operations (AFFO) per unit of 5.3% from 2013 to 2018. It also increased its dividend five times in the five years during that span.
The company continues to grow by funding numerous expansion efforts in dominant markets across Canada. In addition, the contracts it has in place have rate hikes embedded in them to provide more organic growth on top of the development activities.
At the end of the second quarter, the company had an occupancy rate of 98.7%, and the AFFO payout ratio was just 77% on the dividend, which yields more than 5%.
The dividend looks to be highly stable, and given CT REIT’s growth prospects and its history of dividend increases, it is likely it will continue to increase the dividend when pertinent. This makes CT REIT a top investment for long-term income investors.
Bottom line
Investors always need to do their homework regardless of the stock; however, even if a high-yielding stock seems safe when you’ve done your homework, tread carefully, as the market has priced it that way for a reason.
