Canadians who are looking for passive income right now seem a bit too focused. That is, on a high dividend yield and not much else. While a high yield is great, it can also be problematic. After all, a high yield is directly related to the company’s share price. So, if a share price is getting lower and lower, a dividend yield will climb higher and higher.
Why is that a problem? For two reasons. A higher dividend yield can drop to almost nothing should a company decide to cut the dividend. That would be the case if they need the cash flow immediately. Furthermore, a higher dividend yield could mean the company only does worse rather than better. While you have a higher dividend, that doesn’t mean a share price is going to recover in the meantime.
What to look for
Instead, Canadian investors should consider looking at all points of passive income when considering high dividend yields. Ideally, a company should have a share price that will support the company’s dividend. Usually, a company will have a goal of what their yield should look like.
This can be a great tell if you’re buying a company’s dividend yield at a lower yield rather than a higher one. If a company wants to maintain a 5% yield but has been at 4% for some time, that could mean there is a rise in its dividend coming.
But that will only happen if the company can support that dividend. That’s why you need to look at two things. First, the payout ratio, which should be between 50% and 80%. This provides enough resources for the dividend without overwhelming the company. Further, look at its debt-to-equity (D/E) ratio. If the company has high debts that equity cannot cover, a dividend cut could also be coming.
A stock to consider
Canadian investors should certainly consider the Big Six banks for many reasons. Yet one of the highest dividend yields you can get from them right now is from Canadian Imperial Bank of Commerce (TSX:CM).
CIBC stock continues to trade at a discount compared to its peers. The bank is up 3% in the last year but still down from all-time highs after a stock split. Yet it continues to trade in value territory even with this discount at just 11.29 times earnings.
Furthermore, there is reason to be bullish about the future of CIBC stock. That’s because the bank already has plenty of provisions for loan losses, which it will need in the next year. Yet as interest rates come down and inflation as well, the bank should only perform better and better.
Now to the dividend
Meanwhile, CIBC stock currently holds a juicy dividend yield of 6.18% as of writing. That’s far higher than its five-year average of 5.24% as well. The bank also continues to have a quite reasonable payout ratio, currently at 67% as of writing, which is what we look for when finding a dividend that a company can support.
Granted, there is certainly more room for improvement for CIBC stock. The bank was doing quite well before the fall, with an improvement in customer service bringing in more and more clients. However, the bank is also heavily invested in the Canadian market as well as the housing sector — two areas that are going to take some time to recover.
Yet that’s exactly why now is a great time to buy. It looks like there are already improvements in the market, which means investors should only see their shares rise. This should provide Canadian investors with a high dividend yield for now and higher returns in the near future. So, buy CIBC stock while you can!
