2 Ultra-High-Yielding TSX Stocks to Buy With $1,000

Ultra-high-yielding TSX stocks are risky. Investors should be on top of market news to potentially make outsized income and returns.

| More on:
Increasing yield

Image source: Getty Images

What’s considered an ultra-high yield for TSX stocks? Right now, the best yield for a one-year Guaranteed Investment Certificate (GIC) is 5.3%. So, how about considering an ultra high yield to be greater than 5.3%? Remember that stocks could potentially deliver price appreciation as well.

Does higher yield imply higher risk?

The general rule of thumb is that there’s a catch in ultra-high-yield stocks. These dividend stocks could deliver slower growth, have greater debt levels, or even have a higher chance of cutting their dividends.

For example, Algonquin Power & Utilities (TSX:AQN), a regulated utility, just cut its dividend by 40%. In the last few months, its dividend yield reached north of 11%. Of course, through the high yield, the market was already giving a cue that its yield wasn’t safe. After the cut, the stock now yields just under 6.1%. So, it’s still an ultra-high-yielding stock.

Can you trust Algonquin’s yield now? The latest company update indicates that Algonquin is committed to maintaining an investment-grade credit rating of BBB. The payout ratio for its smaller dividend is much more sustainable. And going forward, it aims to increase its dividend at a rate that more aligns with its adjusted earnings-per-share growth.

There are some uncertainties, though. It plans to make $1 billion in additional asset sales. The proceeds will go to debt repayment or to fund growth. In December, the U.S. regulator, Federal Energy Regulatory Commission (FERC), stopped Algonquin from acquiring Kentucky Power, which was a big piece of Algonquin’s growth plan. But Algonquin continues to work on this acquisition to gain FERC’s approval.

Algonquin probably wouldn’t have cut its dividend if interest rates were low. But because of interest rate hikes in 2022, and it has had relatively high debt levels, it is now forced to reduce its debt to improve its balance sheet. On the positive, it doesn’t need to issue new equity through 2024. Hopefully, by 2025, its stock price will have recovered substantially.

Currently, it’s a turnaround investment that analysts believe can deliver price appreciation of 30-50% on top of its ultra high yield.

Another ultra-high-yielding TSX stock

Sienna Senior Living (TSX:SIA) is another ultra-high-yielding TSX stock investors can consider. It has maintained a stable and sometimes growing dividend since at least 2011. Government funding helps support its long-term-care portfolio. So, it was able to maintain a relatively high average occupancy of 88.4% in the first three quarters of 2022. (It has yet to report its fourth-quarter results.) The company has also managed its retirement portfolio well. This portfolio witnessed same-property occupancy of 86.5%, up from 78.7% the same period a year ago.

Sienna expects to benefit from a growing aging population. The census projects that the seniors’ population in the +85 age group will triple over the next 25 years in Canada.

The stock sold off in the last year, primarily from rising interest rates. However, it has been bid up in the last three weeks, which could be a cue to buy.

At $11.75 per share writing, Sienna yields 8.0%. Analysts believe investors could potentially pocket price appreciation 23% on top of the ultra high yield.

The Foolish investor takeaway

Ultra-high-yielding stocks are generally higher risk. They may have low earnings or cash flow growth. However, if they are undervalued, they could have outsized valuation expansion prospects. Investors might consider allocating a small percentage (such as no more than 10%) of their stock portfolios in ultra-high-yielding stocks.

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 positions in Algonquin. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

investment research
Dividend Stocks

2 TSX Stocks to Buy in 2024 and Hold for the Next 10 Years

Are you looking for some great TSX stocks to buy in 2024? The market is full of options, but these…

Read more »

Dividend Stocks

Pensioners: 2 Stocks That Cut You a Cheque Each Month

Monthly pay dividend stocks like First National Financial (TSX:FN) cut you a cheque each month.

Read more »

money cash dividends
Dividend Stocks

Want Decades of Passive Income? 2 Energy Stocks to Buy Now and Hold Forever

Are you wondering what TSX energy stocks could pay and grow their dividends for decades ahead? Here are two for…

Read more »

The sun sets behind a power source
Dividend Stocks

2 No-Brainer Utilities Stocks to Buy Right Now for Less Than $200

These two utilities stocks can be some of the best picks for investors if you want to shell out some…

Read more »

financial freedom sign
Dividend Stocks

Million-Dollar TFSA: 1 Way to Achieve to 7-Figure Wealth

Achieving seven-figure TFSA wealth is doable with two large-cap, high-yield dividend stocks.

Read more »

analyze data
Dividend Stocks

How Much Will Manulife Financial Pay in Dividends This Year?

Manulife stock's dividend should be safe and the stock appears to be fairly valued.

Read more »

food restaurants
Dividend Stocks

Better Stock to Buy Now: Tim Hortons or Starbucks?

Starbucks and Restaurant Brands International are two blue-chip dividend stocks that trade at a discount to consensus price targets.

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Dividend Stocks

1 Growth Stock With Legit Potential to Outperform the Market

Identifying the stocks that have outperformed the market (in the past) is relatively easy, but selecting the ones that will…

Read more »