Young investors shouldn’t be afraid of taking smart risks, provided the potential rewards are handsome enough to compensate investors for taking on said risks. Further, investors should avoid investments that may lead to irrecoverable losses. Indeed, the risk is not about stock volatility. Though choppy rides may be perceived as a risk to some new investors, I’d argue that the risk of irrecoverable loss is the real thing to watch out for.
In this piece, we’ll have a closer look at two high-yield names that I believe have a solid risk/reward scenario for income investors seeking to get more yield for less. Of course, chasing a high yield can be a very risky proposition if you don’t put in enough homework. Analyzing the health of the dividend and a firm’s cash flow resilience is key to differentiating between real value plays and troubled stocks that could sink even lower.
Without further ado, let’s have a closer look at North West Company (TSX:NWC) and Northland Power (TSX:NPI), which yield 4.83% and 4.39%, respectively. Of course, there are high-yield dividend stocks out there with yields in the 7-8% range. But such names, I believe, may be a tad too risky for most investors looking to maximize their total returns (gains + dividends) over the course of many years.
Though North West and Northand offer pretty modest yields, I still think investors should consider them while they’re on the high end of the historical range.
North West Company
North West Company is a grocery and retail firm that primarily operates in Canada’s west and north regions, as well as parts of the United States. Undoubtedly, the company serves a lot of remote communities that may be harder for the big, mainstream grocers to reach. In any case, North West has done quite well in its corner of the retail waters over the years. Of late, though, the stock has been on the retreat, with shares down nearly 20% from 2023 all-time highs.
It’s been a challenging past few quarters, especially with inflation’s bite. At around 13.6 times trailing price to earnings, I view the $1.5 billion mid-cap as a value gem with a very attractive and sustainable payout. Sure, you can find cheaper stocks with higher yields, but in terms of risk/reward, I think it’s tough to top the play going into the second half.
Northland Power
Northland Power is a renewable energy producer that’s also been up against it in recent quarters. The stock has nearly shed half of its value from peak to trough. And though there are no signs of slowing negative momentum, I think value hunters may find it wise to step in, even as the dividend commitment gets stretched a bit. At 9.6 times trailing (21.7 times forward) time price to earnings, Northland is a modestly priced green power play that may be getting too cheap to ignore.
Sure, earnings could stall for another several quarters. But for the patient, I do see considerable upside through the next three years. For now, Northland is worth buying gradually on the way down. Don’t time the bottom if you’re looking at entering the name. Instead, focus on building a full position over the next year or so. That way, you won’t fret should shares continue their steady retreat.
