An 8% dividend yield is an incredible thing! At that rate, any capital you invest today could double within nine years based purely on actual cash flow. Many dividend stocks also offer healthy capital appreciation, which is just icing on the cake.
However, higher dividend yields should be taken with a grain of salt. Sometimes, the yield is higher than average because investors are skeptical about the company’s prospects or see some threats to the cash flow on the horizon. Other times, the higher yield is simply the result of a lucrative business model. Here are two examples of the latter.
Business financing
Alaris Royalty (TSX:AD) is the perfect example of an overlooked dividend stock with robust prospects. The company offers long-term financing to small- and medium-sized businesses across North America. These business loans have lucrative interest yields, which translates to better cash returns for the company and its shareholders.
At the moment, the stock offers a 7.55% dividend yield. That dividend yield is backed by some robust fundamentals. Alaris reports an 82% operating margin and 62.7% profit margin. Debt to equity is just 55%, while the dividend payout ratio is 84%. To put it simply, the company has plenty of assets and a lucrative business model that support the dividend payout every year.
Meanwhile, the stock hasn’t performed too badly either. Alaris’s stock price is up roughly 33% over the past year and up 330% over the past 10 years. The stock suffered a bit during the oil price collapse in 2014, but in recent years the business seems to have diversified beyond oil and gas companies, which enhances the portfolio’s value.
Commercial real estate
Real estate investment trusts (REITs) are another great source of attractive dividends. However, I believe residential property across Canada may be overvalued at the moment. Commercial real estate, like offices and warehouses, may be a better opportunity.
True North REIT (TSX:TNT.UN) is a purely commercial property fund. At the moment, this team manages a portfolio worth $1.2 billion spread across 47 properties. These are usually office spaces located in urban areas, such as the Greater Toronto Area, Ottawa, and Calgary.
Long-term leases (the average deal is 4.7 years) and high occupancy ratios (97% occupancy) from reliable tenants such as the Government of Canada and Alberta Health Services reinforce the strength of this company’s cash flows. This translates into a lucrative dividend yield: 8.3% at the time of writing.
As with any other real estate firm, the debt load is critical to the valuation. True North seems to have managed its debt burden effectively for the past few years. Debt to gross debt has been between 55% and 60% since 2014, dropping as low as 52% in its most recent quarter.
This one definitely deserves a spot on your dividend stock watch list.
Bottom line
High yields and robust fundamentals don’t usually mix. However, the stocks mentioned above both seem to have struck the perfect balance between risk and reward. These 8% dividend yields are backed by companies with low-debt, high margins and recurring cash flows.
Add them to your passive-income watch list.
