Holding dividend stocks that pay juicy and safe dividends can give you the peace of mind you need in the volatile stock market.
What’s a safe and juicy dividend?
A safe dividend is one that has a slim chance of being cut. A safe dividend is protected by stable earnings or cash flow and a sustainable payout ratio.
A juicy dividend yield is one that is 1.5 to two times that of the stock market’s. Currently, the Canadian stock market yields about 2.6%. So, a juicy dividend yield would be roughly 3.9-5.2%.
As examples, here are two safe dividend stocks that offer juicy dividends.
A bank stock with a juicy dividend
Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM) stock’s dividend yield of 5.3% is even juicier than our required range. As a part of the Big Six Canadian banks, it operates in a favourable regulatory environment that helps protect its profitability.
Like the other big banks, CIBC is characterized by a long history of dividend payments, which is supported by predictable earnings. In most years, CIBC bank stock either has stable or growing earnings.
In years where there is economic contraction, including last year, banks will experience setbacks. However, these are a natural course of the economic cycle.
CIBC was able to keep its dividend safe through at least the past 20 years because of its tendency to maintain a safe payout ratio of below 50% in most years.
At under $110 per share, the bank stock offers a safe dividend yield of approximately 5.3%.
REITs are better for passive income than rental properties
Real estate investment trusts (REITs) have a professional teams managing the underlying properties. So, you don’t have to manage the properties or hire someone else like landlords do.
As a REIT stock investor, you only need to protect your principal and seek safe dividends. Right now, H&R REIT (TSX:HR.UN) offers both.
It cut its cash distribution in May 2020. But the depressed stock and safe cash distribution going forward are exactly what makes the diversified REIT a compelling buy today.
In Q1-Q3 2020, H&R REIT’s funds from operations only dropped 5% year over year. Due to the dividend cut, its payout ratio this year will be about 50%, which provides a big cushion for its current cash distribution.
At about $12.21 per unit at writing, the stock yields about 5.6% and can trade 40% higher even if it just recovers to 75% of its pre-pandemic peak.
The Foolish takeaway
Between CIBC and H&R REIT, investors can get a safe dividend yield of close to 5.5%. CIBC will ride on the economic recovery that’ll come after the pandemic is over.
H&R REIT is a passive income investment that’s more of a value play. It’s depressed because of the concerns around retail properties that make up about a third of its portfolio.
Furthermore, investors might be worried about the long-term uncertainty around office properties that make up about 44% of its rent, though it’s been collecting 99% of the rent from this portfolio recently.
Regardless, H&R REIT’s 5.6% yield, which is paid out in monthly cash distributions, is a great income addition in a TFSA, RRSP, or RESP because of the more complicated tax reporting nature of its cash distribution. That is, by holding the stock in a TFSA/RRSP/RESP, investors won’t have a headache when tax-reporting time comes around.
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 Kay Ng has no position in any of the stocks mentioned.