A high yield is not inherently unsustainable, and a low yield is not always sustainable, but this “pairing” is common enough. When picking up dividend payers, even if you are choosing exclusively from among the top stocks trading on the TSX (and top players in their sectors/industries), it’s a good idea to evaluate the sustainability independently from the yield.
An energy stock
Enbridge (TSX:ENB) is arguably the best dividend stock in Canada’s energy sector. Not only is it an undisputed midstream leader in North America, transporting a substantial segment of the oil and gas produced in the region, but it also has a stellar dividend history and a healthy financial mix.
The bulk of its revenues are from long-term pipeline contracts that are immune to price fluctuations (though not from long-term demand/supply trends and cycles), and a major portion of its revenues come from its natural gas utility business.
Financial evaluation of the viability of Enbridge’s dividends, especially if we limit ourselves to the payout ratio, does not make it look promising.
However, its dividends make up a relatively healthy portion of its funds from operations (FFO), and the company is focusing on making its payouts even more financially healthy going forward by adopting a conservative dividend-growth policy. This makes its 8.2% yield quite sustainable.
A bank stocks
The bank stocks in Canada are well known for their safe and, to an extent, generous dividends. But if sustainability is your primary concern, the safest choice would be Royal Bank of Canada (TSX:RY). It’s just as conservative as other banks in the country and currently offers one of the best payout ratios in the banking sector.
It’s operationally safe as well. It has a massive presence in North America, and the revenue streams are diversified both geographically and in operational domains. The bank has been raising its payouts for about twelve consecutive years, with 2020 being the only exception. But it was a regulatory requirement, and the bank more than made up for it with the subsequent, more generous dividend increases.
A REIT
CT REIT (TSX:CRT.UN), while not the most generous pick from the sector, is still offering a juicy 6.6% dividend yield, and there are multiple factors endorsing the sustainability of this yield, starting with the most commonly used metric: the payout ratio. It has been hovering safely below 80% for the past eight years.
Another facet of safety is its chief tenant, Canadian Tire. Most of its 370 properties are leased to the company and its various brands, and the two benefit from a mutually beneficial relationship. For CT REIT, the benefit is the safety of its rental cash flows used to fund the dividends.
A utility company
Fortis (TSX:FTS) is one of the best and most cherished dividend stocks currently trading on the TSX, and the most compelling factor endorsing the sustainability of its dividends is its stellar dividend history. The company has been growing its payouts for 49 consecutive years, the second-oldest dividend streak in Canada.
The dividends are financially safe as well, with payout ratios mostly remaining in the safe territory (below 100%). As a utility business with a geographically and operationally diversified portfolio of regulated assets, Fortis provides another layer of sustainability to its dividends.
An insurance company
Manulife Financial (TSX:MFC) is among the largest life insurance companies in the world by market cap and gross written premiums. It has been operating for over 130 years and has an impressive geographical reach. The company is also diversifying the portfolio of its financial products.
The company has over $1.3 trillion in assets under management. Its revenue streams are geographically diversified as well, with Asia generating the largest slice of the company’s annual revenue.
Manulife has a decent dividend-growth streak of nine consecutive years — and the payout ratio never exceeded 70% in those nine years. Its current 6% yield is backed by an incredibly safe 20.7% payout ratio.
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Foolish takeaway
The five top dividend stocks are leaders in their respective fields, operationally and financially safe, and offer sustainable dividends at decent yields. They can be ideal picks for developing a long-term, healthy, passive-income stream.
