2 Popular Stocks That Could Cut Their Dividends

Companies with debt are feeling the pinch of decade-high interest rates. Many have cut their dividends, and some are at risk of cutting them.

| More on:

On November 2, the US Fed gave investors some relief by maintaining its interest rate at 5.25%–5.5%. And the latest October inflation figure of 3.2% hints that the Fed may hit pause on its rate hike for good. This aggressive interest rate hike has been bothering Canadians and Americans with debt. As the hierarchy goes, creditors get a preference over shareholders in payments. Thus, many companies with high leverage cut their dividends as their interest expense doubled in a year. When a company slashes dividends, its stock price falls. 

Which stocks are at risk of dividend cuts? 

This year alone, Algonquin Power & Utilities, two small commercial REITs, and Northwest Healthcare REIT slashed dividends. The real estate sector is at the cusp of a property bubble burst as mortgages are stressing the finances of several Canadians and businesses. This has put some real estate stocks on the radar of dividend cuts. 

SmartCentres REIT 

SmartCentres REIT (TSX:SRT.UN) is a popular retail REIT because of its Walmart lease and Walmart-anchored stores. The rental income from grocery retail has helped it survive the pandemic without distribution cuts. But this time, its third-quarter earnings are showing warning signs. Its distribution payout is 96.1% of adjusted funds from operations (AFFO) at a 98.5% occupancy. Although the payout ratio has improved from 101.6% last year (with a 98.1% occupancy rate), it is still pretty high. 

The REIT doesn’t have the flexibility to handle any more fluctuations in cash flow. A company cannot sustain such high payout ratios for a longer term. And the way interest rate decisions are progressing, a small rate cut of 0.25% or 0.5% in 2024 won’t be enough to relieve the stress off SmartCentres’ AFFO.   

Although the REIT has not stated any intention to cut distributions, the probability is high. The stock price has dipped 16% year to date, which has inflated its distribution yield to 7.93%. Such a high yield is unsustainable at a 96% payout ratio.

Dividends of Timbercreek Financial 

While grocery retail is resilient, office REITs are vulnerable to economic situations. Timbercreek Financial (TSX:TF) is a lender to commercial REITs that generate income by renting space to businesses. Commercial REITs have been struggling with occupancy rates as many companies are cutting costs by vacating or reducing leased areas. 

Timbercreek is feeling the struggles of commercial REITs as its loan portfolio turnover fell 6% in the third quarter, hinting that REITs have slowed their repayments. More loans are moving to stages two and three, which signals payment delays and defaults. Timbercreek is handling each loan on a case-by-case basis, looking to find a workable resolution. 

So far, the situation is under control. Its distribution payout is at 85.6%, which is slightly higher but manageable. It ended the third quarter with a loan portfolio of $1.1 billion with a 9.9% weighted average interest rate. Most commercial REITs have paused new developments and are struggling to pay existing mortgages. A recession could trigger large-scale default, a risk every lender is facing.

Until now, lenders enjoyed high-interest income. But this cyclicality has reached its peak. It’s now time for a dip. Even if Timbercreek withstands a credit crisis, its dividend will likely take a hit. Thus, its 10.6% dividend yield comes with a high risk of a dividend cut.

Final thoughts 

If a recession hits, the above two stocks are likely to make significant distribution cuts as they are struggling to hold onto their distribution in the current environment.

Instead of getting lured by high yields at risk of a cut, consider dividend aristocrats with a payout ratio at or below 80%. BCE or Enbridge are good alternatives. And if you are looking for monthly payouts, CT REIT is a less volatile option. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge, NorthWest Healthcare Properties Real Estate Investment Trust, SmartCentres Real Estate Investment Trust, and Walmart. The Motley Fool has a disclosure policy.

More on Dividend Stocks

woman analyze data
Dividend Stocks

The Smartest Dividend Stocks to Buy With $1,000 Right Now

Do you have some cash to invest but want to earn a safe, low-risk dividend return? These dividend stocks are…

Read more »

An investor uses a tablet
Dividend Stocks

5 Canadian Dividend Stocks I Think Everyone Should Own

These Canadian stocks have a solid track record of dividend growth and offer compelling yields near their current market price.

Read more »

calculate and analyze stock
Dividend Stocks

This 4.4% Dividend Stock Pays Cash Every Single Month

This high-quality Canadian dividend stock offers an attractive yield and plenty of long-term growth potential.

Read more »

edit Safe pig, protect money
Dividend Stocks

3 TSX Dividend Aristocrats That Can Weather Any Economic Storm

Market volatility has investors wondering which stocks can withstand an economic storm. Here are three to consider today.

Read more »

people relax on mountain ledge
Dividend Stocks

Top Canadian Stocks to Buy for Passive Income 

Are you building a passive income portfolio that can beat inflation and provide higher purchasing power? You could consider buying…

Read more »

voice-recognition-talking-to-a-smartphone
Dividend Stocks

1 Magnificent Canadian Dividend Stock Down 40 Percent to Buy and Hold Forever

This magnificent Canadian dividend stock trades at a huge discount, offers stellar growth, and pays one of the best yields…

Read more »

A plant grows from coins.
Dividend Stocks

Top Canadian Stocks to Buy for Dividend Growth

Dividend growth stocks can be a good option to build a passive income that beats inflation and improves buying power.

Read more »

Concept of multiple streams of income
Top TSX Stocks

The Best Stocks to Invest $1,000 in Right Now

Here are some of the best stocks that every investor should own today to generate massive income and strong growth…

Read more »