Thousands of Canadian investors have ventured into the high-yield market, looking for a safe way to get a decent yield from their savings.
Naysayers will say any dividend above the 5-6% range is unsafe, and at risk of getting cut. I couldn’t disagree more. There are dozens of succulent dividends even far above the 6% mark that are safe, and look to be sustainable for years to come.
In fact, I’d even argue the majority of high yields on the TSX are sustainable. Just don’t expect huge capital gains. That’s what happens when a company pays out the majority of its earnings.
There are always stocks at risk of cutting their payouts. With Dorel Industries making news for recently suspending its dividend — a move that caused shares to crater by more than 30% — investors need to take a proactive approach to their portfolios. The time to sell is before the dividend cut. You’ll save much of your capital that way.
Let’s take a closer look at three succulent dividends I think are in danger.
American Hotel Properties
American Hotel Income Properties REIT (TSX: HOT.UN) is the owner of hotels in the United States. Through a series of acquisitions, the company has transformed itself from a budget hotel owner into a company that focuses on mid-range brands in major cities.
One of the problems with this strategy has been requirements to spend aggressively on certain hotel renovations. These commitments, which continue through 2020, have impacted adjusted funds from operations, the important cash flow metric for REITs.
American Hotel’s current payout ratio on a rolling 12-month basis is right around 100%, which could prove to be too aggressive even if the economy continues to hum along. If we enter a recession, the stock is likely to cut its succulent payout, which currently stands at 12.9%.
And yet, despite all this, I still own shares. What gives?
In my mind, I’ve already considered the dividend slashed. The stock is so cheap on traditional value metrics (like price-to-book value and price-to-adjusted funds from operations) that I think significant upside occurs once the company rights the ship. If it can maintain the dividend during that process it’ll just be an added bonus.
Shaw Communications
Shaw Communications (TSX: SJR.B)(NYSE: SJR) isn’t really a high-yield choice; its shares only pay a 4.6% dividend. But I’m still concerned with the company’s payout over the long term.
Shaw is a company in transition. The firm is seeing significant declines in its legacy businesses, including major weakness in home phone, cable, and satellite TV customer counts. I highlighted this in a recent article on the risk of new streaming services further impacting Shaw.
It’s mitigating this weakness by hiking prices to current customers, but I’m not sure how much longer cable subscribers will put up with that.
Meanwhile, Shaw is spending aggressively on its Freedom Mobile subsidiary, hoping to eventually grow the regional wireless player into a nationwide service. However, that takes a lot of capital — cash that must be borrowed.
Remember, much of Shaw’s earnings are going toward its dividend, which doesn’t leave much left for growth, which could mean the dividend is the ultimate casualty.
Vermilion Energy
Although I admire management’s desire to maintain Vermilion Energy’s (TSX: VET)(NYSE: VET) 13.1% yield, there’s a reason the payout is so high. It’s in danger of being halved, at least.
Bulls will point to the fact that Vermilion can afford its dividend if oil stays above US$50 per barrel. That’s true, but it doesn’t leave much room to grow production.
It’s better for the company to pay a lesser dividend and put the money saved into new capital expenditures — investments that will eventually pay off in a big way if oil prices recover.
Vermilion is one of the finer Canadian mid-cap oil companies because it has a solid balance sheet, a focus on low-cost production around the world, and it’s been a steady grower, even during tough times. It should strive to improve these metrics, even if the cost is a dividend cut.
