It’s starting to look like the 2023 bull market is running out of steam. A major rally sent tech stocks to ridiculous highs earlier this year, leading to such stocks treading water in the second half. More recently, such stocks have been outright crashing, sending the tech-heavy NASDAQ-100 Index into correction territory. High-yield sectors, in the meantime, have been beaten down (despite often delivering high earnings growth), leading to their already high yields going even higher.
It’s too early to say that the 2023 bull market is over, but it always pays to prepare your portfolio for the possibility that markets will turn against you. In this environment, it’s much better to be buying yield than tech. Without even wading into stocks, you can already get 5.5% yields on Guaranteed Investment Certificates, which beats the earnings yield on most tech stocks. At the same time, high-yield stocks are much more sensibly valued than the tech stocks that led this year’s bull market. In this article, I will explore a dirt-cheap financial stock with a 7% yield and sky-high earnings growth that could add some much-needed dividend income to your portfolio.
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First National
First National Financial (TSX:FN) is a Canadian non-bank lender that issues mortgages to Canadians. It partners with mortgage brokers to find borrowers who are looking to shop around for mortgages rather than just accept whatever their bank offers them. In this respect, it operates much like a bank. The difference is that FN does not take deposits, instead funding its loans using bonds that it issues. As a result, First National does not need to worry about about liquidity or “bank runs.” This is an important advantage because, as we saw in the spring of 2023, bank runs can and do cause banks to fail.
First National’s most recent quarter was very strong. In the quarter, the lender delivered the following:
- $526 million in revenue, up 26%
- $138 billion in mortgages under administration, up 8%
- $89.9 million in operating income, up 61%
- $89.2 million in net income, up 41%
- A 41% payout ratio
Those are all very good results. The growth was rapid, and the percentage of earnings paid out as dividends was not very high. All signs suggest that this company will be able to keep paying its dividend and may, in fact, even raise it.
On that note, FN stock yields 7.1% today. That’s a higher yield than you’ll find on the vast majority of TSX stocks, yet FN actually has a very low payout ratio. Finally, FN’s dividend has been growing over time. It has raised its payout every year for the last 11 years. In the last five years, the rate of increase has been 5.3% per year.
Why FN stock has such a high yield
Having noted that FN has high growth and high profit margins, we now need to explore another question: why does the stock have such a high yield?
Normally, very high yields are associated with risky or low-quality stocks. They acquire their high yields by being sold off and declining in price. That has happened with FN stock to an extent: it’s down 36% from its all-time high. So, that’s part of why it has a very high yield.
Another part of the story is the company’s dividend growth. As mentioned previously, the company has raised its dividend every single year for the last 11 years running. When you combine that kind of dividend growth with a falling stock price, you get a high yield. And with a 41% payout ratio, First National stock is a high yielder that’s also safe!
Foolish takeaway
Is the 2023 bear market over? Maybe, maybe not. What we know for sure is that high-yield stocks have even higher yields now than ever before. There’s a strong case to be made that you’ll make more money owning such stocks than by buying the stocks that drove 2023’s tech-led bull market.
