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Income Investors: 7% Dividend Yields That Are Actually Safe

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The coronavirus pandemic has wreaked havoc on the global economy. Many companies that were thriving just last year now find themselves on life support. Financial flexibility, in aggregate, has gone down, and we find ourselves navigating into an environment where dividend cuts are becoming the new norm. For income investors, that’s not okay, especially since these are the times when people need the income the most.

Last week, Suncor Energy slashed its dividend by 55% while axing capital spending for the second time. This move was viewed as unforgivable to many income investors.

Dividends aren’t as safe as they seem these days. And those colossal yields that have presented themselves? They could be taken away from you on a bombshell dividend cut announcement, and you could be left holding the bag as income investors rush to the exits. That’s not to say all large dividends are unsafe, though. You just need to do more homework into the balance sheet and have a better gauge of the type of cash flow disruption that firms are in for.

Consider shares of Enbridge (TSX:ENB)(NYSE:ENB) and Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM), which sport 7.5% and 7.1% yields, respectively, at the time of writing. Both dividends look safe and are likely going to escape this crisis intact, despite dire headwinds that lie ahead.

Enbridge

Many folks see Enbridge as following the footsteps of its energy peers upstream, by taking the axe to the dividend to free up financial flexibility. While a dividend reduction may be the best course of action for the pipeline kingpin following the worst rout in oil prices ever, I just don’t see Enbridge breaking its “dividend promise” to income investors, even though its financial flexibility has become less than ideal.

Call Enbridge’s shareholder-friendly management team stubborn if you want, but they will swim to great lengths to keep its dividend intact. Over the past few years, the company could have reduced its swelling dividend when it was put in a tight financial spot, but it chose to pull other levers instead to free up liquidity.

Enbridge’s commitment to rewarding its shareholders through these tough times will not be forgotten. The TTM payout ratio has swelled to 112%, but management has a few tricks up its sleeves to shore up cash while keeping its promise.

Canadian Imperial Bank of Commerce

CIBC is the dog of the Big Five Canadian banks. It’s a perennial underperformer with a discount to the peer group and has sported a much larger dividend yield. Although CIBC is the most vulnerable to a Canadian housing market collapse amid the Canadian credit downturn, it’s worth remembering that CIBC, like its peers, is ridiculously well capitalized.

Provisions for credit losses (PCLs), fewer loans at lower margins, and coronavirus-induced fear could cause shares of CIBC to fall much further, while its yield continues to swell. But given the dividend is still far better covered than that of most other firms with yields that are half its size, I’d say that it’s going to take more than a worst-case scenario before CIBC even considers taking the axe to its dividend.

That said, the stock is on unsound footing and could continue to plunge. So, I’d be wary of buying the name at these levels if all you’re looking for is a safe, large dividend. CIBC’s peers sport generous yields and may offer a better bang for your buck at this juncture.

Stay hungry. Stay Foolish.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Enbridge.

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