Chasing dividend yield is typically a bad idea, especially if you’re screening out stocks and REITs (real estate investment trusts) solely on yield. You may know that a yield climbs when the price of a security moves lower. That is, until a dividend cut is served up. Though a swelling yield and falling share price may indicate an at-risk payout, there are numerous dividends and distributions out there that are not only safe but able to keep growing over the long haul.
Of course, there needs to be cash flows to finance dividends. Relying on asset sales to fund such a commitment to shareholders is typically not a good idea. In this piece, we’ll look at two stocks that I believe have “legit” dividends that won’t be subject to cuts, at least not anytime soon. Sure, stretched dividend commitments are never ideal. But assuming cash flows hold up in the face of macro pressures, I think there’s value to be had in some investments that are getting a tad heavy on the yield side.
Consider SmartCentres REIT (TSX:SRU.UN) and Enbridge (TSX:ENB), two stocks with +7% yields that may be a great value at current levels. Though each payout may be under growing pressure, I think long-term investors can do well from the total-returns front over the next three years and beyond.
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SmartCentres REIT
SmartCentres REIT sports a gigantic yield of 7.75%. Undoubtedly, a payout that large requires extra due diligence. With the costs of borrowing rising, Smart is sure to feel the pressure. That said, the REIT sported $828 million in liquidity as of the end of the last quarter. The distribution may be towering, but the REIT has options to consider, as it pushes through these tough times.
Finally, SmartCentres’s development pipeline makes it one of the most intriguing retail REIT plays in all of Canada. Of course, it will take time for developments to move the needle higher on the shares. Regardless, I view Smart as a smart value play now that it’s down to $23 and change.
Should negative momentum drag shares to 2020 levels, I may have to add to my position. Even if the payout grows to become too big of a commitment, I’m a fan of the assets and growth pipeline you’ll get from the name.
Enbridge
Enbridge is another high-yield play that’s no stranger to stretched payouts. The stock has been through tougher times, only to rise out of the funk with its dividend in one piece. The current 7.34% yield is getting swollen again. Fortunately, Enbridge’s history of keeping its payout alive through the most horrific times gives me confidence in the sustainability of the dividend.
Indeed, the $97.2 billion pipeline firm is unloved right now. And as shares continue their descent, I think yield-hungry investors should be ready to snag a few shares, as the company finds ways to navigate through the coming year’s slate of unique challenges. Indeed, pipeline stocks aren’t exactly exciting these days. However, for those seeking a good value for dividends, I find it tough to top the name going into the late summer.
Stay smart with the high yielders
Don’t over-reach too far for yield. If you are going to, though, insist on investments with solid track records of operating in a climate where there are only headwinds.
