Even though the TSX is home to a lot of decent dividend stocks, it’s very rare to see yields in double digits, which some might classify as “ultra-high-yield” dividend stocks. It usually happens when stocks that are already offering an adequately high-yield plunge deep during weak markets or crashes.
It’s a great opportunity when the underlying business is financially healthy but a risky move if the high yield comes with fundamental weaknesses. In those scenarios, a dividend cut or complete suspension might be in the cards, which isn’t a desirable situation for investors.
But if you invest in ultra-high-yield stocks that may have a decent chance of recovering, you can get amazing returns on your investment in the next few years, thanks to a combination of high-yield and recovery-fueled capital appreciation (total returns).
An investment management firm
Montreal-based Fiera Capital (TSX: FSZ) has almost always been a decent dividend stock and has become even more generous over time. But the yield hasn’t been as high (at least in the last decade) as it is right now. At 10.29%, Fiera is offering one of the highest yields currently available on the TSX.
If the company maintains its dividends for the foreseeable future, you will virtually get 10% of your capital back every year, and in a decade, it will return to you back all the capital you have invested in it via dividends alone. However, we can add growth to the mix as well.
The stock is currently trading at a 27% discount from its 2021 peak, a hefty enough discount, and it’s on the downward track. The valuation is still above the fair mark, which may indicate a continued downward motion for a while at least.
If the recovery-fueled growth pushes the stock up by just 50% in the next five years (a relatively realistic probability), your overall returns would be akin to doubling your capital by 2028 — half of which would be in payouts and the other half in capital appreciation.
A REIT
True North Commercial REIT (TSX: TNT.UN) is one of the smaller commercial real estate investment trusts (REITs) in Canada, with a market capitalization of just $527 million, and it’s becoming smaller by the day. Like most other real estate companies, True North is currently among the undervalued stocks of the TSX, though by a small margin. However, the discount is hefty enough at 24%.
The steady decline since hitting the peak in Aug. 2021 has pushed the yield up to a magnificent level — 10.33%. With this yield, you can generate a monthly passive income of about $258 with $30,000 invested in the REIT. Thankfully, the payout ratio has not been affected on the same scale and is still under 100%.
As for its performance by 2028, there is a decent chance that the stock might reach or even go beyond its pre-pandemic peak, from which it is currently 29% down. In a healthy market (2019), the stock rose by 30% in a single year. If it manages similar growth in at least part of the next five years, it may easily double its money by 2028, especially with the help of its generous payouts.
Foolish takeaway
Both ultra-high-yield offering companies are small-cap stocks and might remain so, even if they fully recover. That doesn’t necessarily mean that they are relatively risky companies, but if you only wish to invest in blue-chip or large-cap companies, the two stocks above might not be up your alley.
