A Dividend Giant I’d Buy Over CIBC Stock Right Now

CIBC stock may underperform the broader markets significantly given its exposure to mortgage loans in Canada.

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There are several dividend stocks trading on the TSX, but just a handful of them may deliver outsized gains over the long term. You need to identify stocks with attractive yields and the ability to increase dividend payouts consistently across market cycles.

I’ll compare two such high-yield TSX dividend stocks to see which is a better buy right now.

Should you buy CIBC stock for its 6% yield?

While bank stocks are cyclical, several Canadian banks have maintained dividend payouts, even during periods of recession, such as the dot-com bubble and the financial crisis of 2008.

The conservative nature of TSX banks and their well-capitalized balance sheets have allowed them to generate market-beating returns to shareholders. However, a tepid lending environment in 2023 due to interest rate hikes may negatively impact Canadian Imperial Bank of Commerce (TSX:CM) and its peers in the next 12 months.

As the cost of debt rises, demand for mortgage, commercial, and personal loans is expected to decline rapidly. Moreover, higher rates will also increase delinquency rates, especially if recession fears turn out to be true.

Canadian housing prices are expected to pull back significantly after a multi-year bull run, where homeowners enjoyed record-low interest rates. Consumer loans account for 62% of total CIBC loans in Canada, while mortgage loans make up around 55% of the total loan book. Further, over a third of these loans are issued at variable rates, increasing borrowing costs in recent months.

Compared to other big banks in Canada, CIBC has a large exposure to the domestic market. For instance, profits derived from Canada account for 75% of total earnings compared to the 18% derived from U.S. markets. Toronto-Dominion Bank, however, generates 30% of its earnings from the United States.

Down 31% from all-time highs, CIBC stock currently offers investors a tasty dividend yield of almost 6%. Its dividends have risen by 7.2% annually in the last 20 years. However, after adjusting for dividends, the TSX bank stock has returned 506% to shareholders since April 2003, trailing the S&P 500 index, which has gained close to 600% in this period.

Is RNW stock a buy right now?

If you are looking for a high-dividend stock, consider investing in TransAlta Renewables (TSX:RNW), which yields 7.5%. TransAlta pays investors a monthly dividend and is among the largest clean energy companies in Canada. The company ended 2022 with a free cash flow of $347 million and a net income of $91 million.

It aims to provide stable returns to shareholders by investing in contracted renewable and natural gas facilities. These infrastructure assets generate predictable cash flows and are backed by long-term contracts with investment-grade counterparties.

TransAlta is one of the largest wind power generators in Canada and ended the last year with 48 facilities in three countries, generating 3,211 megawatts of power.

In the last 10 years, RNW stock has returned 134% to shareholders and shares are currently trading 41% below all-time highs. The TSX stock is priced at a discount of 5.5% to consensus price target estimates. After accounting for dividends, total returns may be closer to 13% in the next 12 months.

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 Aditya Raghunath has positions in TransAlta Renewables. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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