10% Yield: Is This TSX Small-Cap a Buy for its Dividend?

Interest rate hikes in the last two years have dragged the share prices of lending companies significantly lower. Investors are worried that higher interest rates will lead to tepid demand for loans as well as increase default rates, negatively impacting sales and profit margins for companies in this segment.

But the drawdown in valuations has driven the dividend yields of lending companies higher, making them attractive to income-seeking investors.

One such small-cap TSX stock is Timbercreek Financial (TSX: TF), which trades almost 32% below its all-time high. However, it also offers you a dividend yield of 9.9%, given an annual payout of $0.69 per share. Let’s see if you should buy this TSX dividend stock for its high yield right now.

An overview of Timbercreek Financial stock

Valued at $582 million by market cap, Timbercreek Financial is a non-bank lender that provides short-duration structured financing solutions to commercial real estate investors. The company invests directly in a diversified portfolio of mortgage loans secured by income-producing commercial real estate, which includes multi-residential, office, and retail buildings in urban Canadian markets.

Timbercreek Financial fulfills demand from an underserved sector of the mortgage market. The company explained, “This segment of the Canadian borrower market is typically under-serviced by commercial banks that are reluctant to dedicate resources to these smaller, shorter-term mortgage investments and cannot typically provide the structure required to meet the borrower’s needs.”

Timbercreek’s borrowers are commercial real estate investors who look to finance capital improvements or redevelopment of a property. These investments in commercial mortgages can enhance the performance and diversification of fixed-income portfolios. With a strong track record, Timbercreek offers investors an opportunity to earn a steady stream of passive income, given it has a monthly distribution of $0.0525 per share.

How did Timbercreek Financial perform in Q3?

With more than $15 billion in mortgage originations in North America and Europe, Timbercreek Financial ended the third quarter (Q3) with over $3 billion in assets under management. It has 105 mortgage investments with an average net mortgage investment size of $10.5 million and a weighted average loan-to-value ratio of 67%.

In Q3 of 2023, Timbercreek Financial reported net investment income of $30.3 million, up from $30 million in the year-ago period. Its distributable income stood at $16.8 million, or $0.20 per share, indicating a payout ratio of 87.4%, given its quarterly dividends were $0.17 per share.

Timbercreek Financial’s new mortgage advances were $58.2 million, while advances on existing mortgages were $17.5 million. It also received $61.9 million in net mortgage repayments. The company emphasized mortgage repayment activity was low in Q3 due to sector-wide slowness.

Is the TSX stock undervalued?

Analysts tracking Timbercreek Financial expect its sales to rise by 11.6% to $124 million, while adjusted earnings are forecast to grow by 14.5% to $0.79 per share. So, priced at 8.8 times forward earnings, Timbercreek Financial stock is quite cheap, given its high dividend yield.

Analysts remain bullish and expect Timbercreek stock to gain over 25% in the next 12 months. After adjusting for dividends, total returns may be closer to 35%.