2 High-Yield Dividend Stocks With Rock-Solid Payout Ratios

The payout ratio is a good predictor of the financial stability of the company’s dividends, but that shouldn’t be the only thing to base your purchase decision on.

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What do you look for in a dividend stock? If you seek well-rounded returns, you may weigh both the stock’s dividends and growth potential. But if you are looking for income, the two most important factors to consider might be the stock’s yield and the financial stability of the dividends.

A thorough fundamental analysis of the company can give you a good overview of the business’s financial strength and potential. But the quickest way for most investors to evaluate whether a company will manage to sustain its payouts in the long run is usually the payout ratio.

Dividend stocks that offer a high yield and very stable payout ratios are relatively rare, and if your primary goal is producing income, you may consider snatching them up as soon as they become available in the market. There are two such stocks that you might consider looking into.

A bank stock

When it comes to reliable dividend stocks, Canadian banks are among the top choices for most investors. And the top choice (from the yield’s perspective) right now is Bank of Nova Scotia (TSX:BNS). Thanks to a healthy 27% dip that the stock is currently in the process of recovering from, the yield has gone up to 6.1%. The payout ratio of 50% is characteristic of the banking sector.

Buying the stock now makes sense from both a dividend and capital-appreciation perspective. The stock is currently undervalued as well as discounted, and the pricing may fluctuate for a few months, at least, at least until the recession has come and gone.

But in a healthy, bullish market, the stock may go up just like it did after the Great Recession. If that happens, not only will you enjoy the amazing 6.1% yield that you have locked in, but also enough growth to double your capital in under a decade.

The Canadian bank stocks are resilient and safe enough to survive the recession and recover, assuming you are holding them for long enough. They also have a history of sustaining and growing their payouts consistently, making them a solid choice for long-term dividend holdings.

A REIT

When it comes to buying a real estate investment trust (REIT) for dividend income, two important factors to consider are the category and geography of the underlying real estate assets. Slate Grocery REIT (TSX:SGR.UN) checks both these categories.

As the name suggests, its portfolio is mostly grocery anchored (93%), and all of its 121 properties are in the United States. This makes them safe from the current onslaught of the real estate market in Canada.

The stock is also highly attractive from a dividend perspective. It’s offering a mouth-watering dividend yield of over 7.4%, and the payout ratio is 43.4%, which is inherently safe and not just from the real estate sector’s perspective.

What makes the stock different from most other high-yield stocks is that the beefed-up yield is not the result of a dip. The stock is just 10% down from its recent peak, and its trend is still bullish.

Foolish takeaway

The two dividend stocks can help you start a sizable passive income if you invest a large enough sum. Both offer safe dividends and have managed to sustain their payouts during COVID as well, which is a testament to their financial resilience.

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 Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.

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