Mortgage stocks offer some of the highest yields on the TSX today. Whether you’re talking about banks or non-bank lenders, these stocks usually pay more than 4% of their share price in dividends every year! And with the potential for dividend growth, their income could go much higher than that. In this article, I will explore two ultra-high-yield mortgage stocks to buy and one to avoid.
Buy: First National
First National Financial (TSX: FN) is an ultra-high-yield Canadian mortgage lender. Its shares currently offer a 6% dividend yield. There were times in the recent past when you could have bought FN shares at yields as high as 7%, but a rally in Canadian financials reduced the yield on FN.
What makes First National Financial a good value? First, its most recent earnings release was quite good and ahead of expectations. In the most recent quarter, FN delivered the following:
- $142 billion in mortgages under administration (MUA), up 10%
- $8.3 billion mortgage origination (i.e., new mortgages written), up 26%
- $563 million in revenue, up 43%
- $83.6 million in net income, up 108%
- $1.38 in diluted earnings per share (EPS), up 109%
It was a good showing, and there is a reasonable basis for expecting it to continue. The most recent inflation reading came in at 2.9%, still 0.9% above the Bank of Canada’s target. With inflation running somewhat hot, we’d expect the Bank to keep rates high, and indeed, it has hinted that it will do so.
Buy: TD Bank
Toronto-Dominion Bank (TSX: TD) is a Canadian bank that is near and dear to my heart. It has been my personal bank since junior high, and its stock is the longest-standing holding in my portfolio.
Today, TD Bank shares can be bought at a juicy 5% dividend yield. Although TD is one of the fastest-growing Canadian banks in terms of revenue, its earnings took a beating this year due to the termination of the First Horizon deal. This resulted in the stock underperforming its peers. However, the factors that held TD’s earnings back this year were one-time and non-recurring. So, the company’s earnings should bounce back in 2024 — especially if the Bank of Canada keeps rates relatively high.
Avoid: Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) is a Canadian bank that has attracted many investors with its high dividend yield. Paying out a full 6.6% of its stock price in dividends, BNS’s yield easily beats treasury yields and Guaranteed Investment Certificate interest rates.
Unfortunately, BNS has been one of the worst performers among Canadian banks over the years. Its growth has been non-existent, with revenue up 2.3% per year and earnings down 3.3% per year over the last five years. The reason why Bank of Nova Scotia has been underperforming the rest of the Big Six is because it has a lot of money invested in foreign markets that have complex relationships with Canada. These operations caused controversies at BNS in the past, sometimes they also hold back earnings, when the Canadian dollar gains on the currencies of these (mostly Latin American) countries.
Many Canadian banks do business with the U.S., a country that most Canadians know about and whose economy they are familiar with. Most Canadians don’t know much about the Latin American countries that BNS is in, meaning that when you buy BNS, you probably don’t know much about the foreign exchange factors that will influence your company’s earnings. For me, this stock is just too much hassle to be worth it.
