Dividend stocks can provide regular cash income to help you meet daily expenses or redirect into even more savings. That’s why dividend stocks are suitable for both young investors and retired savers.
Yet all dividend stocks aren’t created equal. If you choose the right company, you can count on reliable income for decades to come. Choose the wrong company, and you could suffer serious capital losses.
All too often, dividend investors think there’s a direct link between payout size and sustainability. If a company offers a market-leading dividend, popular wisdom suggests that it’s not reliable. This can be true, but it’s far from a guarantee.
Just take a look at Chemtrade Logistics Income Fund (TSX: CHE.UN). This stock pays an astounding 13.4% dividend yield. That sounds too good to be true, until you realize that Chemtrade has offered the same payout for nearly 15 years, even throughout the entire financial crisis. When it comes to reliability, this dividend checks out.
If this 13.4% dividend is so reliable, why hasn’t the market realized its potential? Let’s dive into the particulars and, more importantly, how you can profit.
Classic ignorance
The stock market isn’t efficient. That means that, on any given day, mispricings can occur. Chemtrade is a perfect example. For nearly 15 years, you could have collected a 13.4% dividend. The stock price is still roughly the same price as it was in 2005, meaning all the cash income was pure profit. What type of rational market allows for such an opportunity?
Here’s the thing: the market isn’t rational. There are many factors that cause mispricings, several of which Chemtrade qualifies for.
First, smaller companies are often undervalued. Over the long term, small-caps stocks outperform their larger peers thanks to this discounting. Valued at just $830 million, Chemtrade is peanuts for most institutional investors and analysts. That means the company gets very little coverage, leading to an even bigger discount for shares.
Second, boring companies are often overlooked, especially at a time when investors are infatuated with the exponential sales growth of tech darlings. Chemtrade is a specialty chemicals distributor that delivers niche products like Liquid Sulphur Dioxide and Sodium Bisulphite to customers across North America. Bored yet?
Combining an incredibly small company with a boring business model is a perfect recipe for a mispricing.
Time to profit
Chemtrade stock has been trading at a discount for more than a decade. Instead of complaining, management has opted to reward long-term shareholders through an outsized dividend.
This decade, expect more of the same from the company. Despite its small market cap, Chemtrade is one of the largest specialty chemicals distributors on the continent, holding leading market shares in dozens of products. In an industry where scale creates lower costs, Chemtrade is at a structural advantage.
Every now and then, commodity prices move the wrong way, causing Chemtrade’s short-term financials to take a hit. That’s the case with the latest dip, which now offers a 13.4% dividend. Time and time again, the company’s structural advantages have righted the ship. There’s no reason to believe that the recent headwind is any different.
Just as it did last decade, don’t be surprised to see Chemtrade stock paying the same reliable dividend every year in the decade to come.
