Each investor has a different risk appetite for stocks in general (compared to other asset classes). And when you get into the asset class (stocks), the risk profile further branches out. We usually assess the risk of growth stocks and dividend stocks differently. With growth stocks, stagnation is sometimes more of a risk than dips, especially if it’s a cyclical stock.
When it comes to dividend stocks (especially the ones you choose purely for dividends), stagnation can be seen as a capital preservation trait. And if it grows, that’s just an added bonus. The real risk is the company suspending or slashing its payouts.
This is why it’s imperative to look into dividend stability and not just the yield when making an investment decision.
A Canadian REIT with a European portfolio
Inovalis REIT (TSX: INO.UN) is an Ontario-based REIT with a commercial portfolio in two countries: Germany and France. The French part of the portfolio is concentrated in the Greater Paris Area, while the German properties are spread out in six cities.
The 14 office properties in the portfolio have an 87.5% occupancy rate (which is not all that impressive). The weighted average lease term is 3.6 years, so investors can be reasonably sure about the financial backing of their payouts till then.
The RIET is currently offering a mouthwatering yield of 8.4%, at a stable payout ratio of 82%. It’s still trading at a 10% discount from its pre-pandemic valuation, which is part of the reason for the highly attractive yield.
An aristocratic yield
REITs are generally favoured for their generous yield, but many of them balance stability with yield quite nicely. The top of the list in this regard are usually aristocratic yields like SmartCentres (TSX: SRU.UN). This particular aristocrat has been growing its payouts for seven consecutive years.
And even though the payout ratio is not as credible an endorsement to its dividend sustainability, since it’s less than three percentage points away from 100%, it’s technically still in the safe territory.
The REIT is currently offering a juicy 6% yield. The REIT grows its payouts at a decent enough rate to at least outpace inflation, which is a powerful endorsement to its candidacy as a passive income resource.
A renewable power generation company
The “stability” of TransAlta Renewables’ (TSX: RNW) dividends doesn’t come from its payout ratio (which is usually well above 100%) nor from its status as an aristocrat, rather from its business model. It comes from a highly contracted portfolio. As a power generation company, it makes money when someone (utility companies) actually buys the power it produces. And the more stable and long-term predictable the demand is, the better it is for the company’s financials.
TransAlta’s portfolio has a weighted average contract life of about 12 years. With most of its portfolio contracted out for well over a decade, the company can make accurate feasibilities (and follow through) when it comes to expansion. Like the recent $173 million financings it’s undertaking for a new wind project.
This stable dividend company is currently offering a decent 5.5% yield and might “sweeten” an investor’s purchase with some capital appreciation.
Foolish takeaway
The reason these dividend stocks might be better off in your TFSA than your RRSP is the function they are performing in your investment portfolio – passive income. And the fact that the passive income is tax-free adds to the benefit.
