Dividends help investors grow their portfolios and compensate for stock price declines. Also, according to Royal Bank of Canada Global Asset Management, dividend stocks have outperformed the broader market over time. However, too high or unusually high yields are red flags.
Small-cap stocks Well Financial (TSX: WFC), Fiera Capital (TSX: FSZ), and Gear Energy (TSX:GXE) are attractive prospects for their sky-high dividend yields, but investors should beware. The high payouts might not be sustainable or well covered by earnings. Unless you’re willing to take on higher risks, extensively evaluate each stock before investing.
Flexible dividend policy
Wall Financial acquires and develops mixed-use residential and commercial properties, primarily in Metro Vancouver and the Lower Mainland. At $19.15 per share, investors partake in the mind-boggling 15.2% dividend. Despite uncertainties in Canada’s real estate sector, the stock is up 66.17% year to date.
The $621.2 million real estate firm maintains a flexible dividend policy that payouts can be annual or semi-annual. Moreover, payment amount and timing depend on cash flow and cash flow requirements to meet or fund current or future developments and investments.
In the year ending January 31, 2021, Wall Financial didn’t pay a dividend due to lower earnings. Fast forward to the first quarter (Q1) of fiscal 2024, and the net earnings were $2.7 million compared to $29.9 million in Q1 fiscal 2023. In the three months that ended April 30, 2023, dividend payments reached $97.3 million ($3 per share).
Consistent quarterly payout
Fiera Capital provides customized multi-asset solutions to public and private market asset classes in North America, Europe, and selected Asian markets. The customer base of this $664.27 million independent asset management firm includes institutional, financial intermediary, and private wealth clients.
The financial stock trades at $6.46 per share (-21.37% year to date) and pays a 13.44% dividend, although the payout ratio (452.63%) is in a danger zone. But in fairness to Fiera, it has never missed a quarterly dividend payment since October 2010. A $6,460 investment (1,000 shares) will produce $217.50 in passive income every quarter.
In Q1 2023, revenue decreased 8.8% to $157.1 million versus Q1 2022, while net loss reached $748,000 compared to the $5.45 million net earnings a year ago. Still, management believes its strategies should deliver positive returns over the long term. The recent distribution partnership with New York Life Investments is a growth catalyst.
Monthly dividends
Gear Energy is a cheap but profitable option, given its share price ($0.96) and dividend yield (12.9%). However, the energy stock underperforms with its 10.06% year-to-date loss due to the overall slump of the sector. The $251.13 million exploration and production company maintains low-cost, oil-focused operations in three core areas.
In Q1 2023, revenue and net income declined 27.3% and 68% year over year to $29.5 million and $1.99 million. The macro commodity price weakness and ongoing inflationary pressure are threats to the business. However, management’s goals in 2023 are to strike a balance between strong returns on capital, production and reserves stability plus continued monthly dividends.
Strongest foundation
Most market analysts doubt the ability of Wall Financial, Fiera Capital, and Gear Energy to sustain their high yields. If I were to invest, the asset management firm would have a strong foundation to support its quarterly payouts.
