Finding high-quality TSX dividend stocks that offer high yields can be appealing. These stocks can help you considerably grow the passive income your portfolio generates. However, as appealing as a high-yield dividend stock is, it’s essential that the stocks you choose to buy have safe and sustainable dividends.
Not only do you want to avoid having your dividends cut, as it will impact the passive income you expect to generate, but in addition, when companies cut their dividends, they often see a massive hit to their share prices.
So, with that in mind, let’s look at three of the top TSX stocks with yields above 7% and whether or not those attractive dividends are sustainable or not.
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One of the best dividend stocks in the energy sector
The majority of energy stocks return cash to investors through a dividend, but while there is plenty of choice for investors, one of the top picks on the TSX has to be Freehold Royalties (TSX: FRU).
Freehold is an ideal TSX dividend stock because it doesn’t produce oil and gas itself. Instead, it allows other companies to use its land for their own production in exchange for a royalty. This is beneficial because Freehold doesn’t have to spend millions on capital expenditures to produce oil and gas.
Instead, the stock is consistently receiving royalty payments and generating attractive cash flow, which it can save to invest in buying more land to expand its portfolio and returns to investors.
The majority of the cash flow gets paid out. In fact, right now, the annual dividend is $1.08 per share, which equates to a current yield of roughly 7.7%. And if you’re wondering how safe that is, in 2023, Freehold generated free cash flow (FCF) per share of $1.59, giving it a payout ratio of just 68%.
It’s also worth noting that in 2024, analysts and investors are worried that if the economy continues to weaken, so could the energy sector. In such a case, Freehold could temporarily see a dip in the free cash flow it generates.
Yet even with a decline expected, Freehold is still expected to earn FCF per share of $1.38 in 2024, giving it a payout ratio of 78%, which still has a significant margin of safety.
A lesser-known royalty stock offering a significant yield
In addition to Freehold, another top TSX dividend stock to buy offering a massive yield is Diversified Royalty (TSX: DIV). Diversified is a stock that’s similar to Freehold.
While it doesn’t have exposure to the energy sector, Diversified Royalty’s entire business model revolves around investing in companies across different industries in exchange for consistent royalty payments.
For example, Diversified Royalty has made investments in Mr. Lube, Air Miles, BarBurritto, Sutton Group real estate, and many more.
Currently, the stock pays out $0.24 annually, which equates to a current yield of 8.9%. Meanwhile, in 2023 it earned FCF per share of just over $0.23. So, its payout ratio slightly exceeded 100%, which could be troubling if Diversified Royalty continues to pay out more cash than it generates.
The good news for investors is that analysts estimate that in 2024, its FCF per share will increase to $0.31, which would more than cover the dividend this year as well as the excess cash it paid out in 2023.
A top large-cap dividend stock
Finally, one of the best and most popular dividend stocks to buy on the TSX is Enbridge (TSX: ENB), and for good reason.
Not only is the $100 billion energy infrastructure stock a dominant player in an essential industry, but it’s also well diversified and constantly generates billions in cash flow.
For example, Enbridge has increased its dividend for 29 straight years, demonstrating what a high-quality and reliable investment it is.
In addition, its annual dividend of $3.66 equates to a yield of 7.8%. Yet according to Enbridge’s own guidance, the dividend is ultra-safe as ENB expects to generate distributable cash flow per share of at least $5.40 in 2024. That would give the stock, at most, a payout ratio of just 68%.
So if you’re looking for top TSX dividend stocks to buy now, Enbridge is certainly one of the best in the business.
