If you’re a dividend investor, you might have found yourself wondering whether you should just buy the three highest-paying TSX dividend stocks and call it a day. Top Canadian companies are often very well protected by government regulations; why not just buy the cheapest and highest-yielding of the bunch? It seems tempting, but there are many risks with buying the three highest-yielding TSX Composite dividend stocks while incorporating no other factors into your analysis.
In this article, I will explore the wisdom of that strategy (or lack thereof), ultimately concluding that it’s not a great idea.
Methodology
Before going any further, I should clarify which stocks I’m looking at here. Canada has a lot of illiquid small-cap stocks that aren’t very well covered. Information on them is lacking. For this reason, I am restricting my list of “highest-yielding TSX stocks” to the TSX 60, a 60-stock subset of the whole 250-stock index. This removes shady penny stocks from the equation and restricts the list to companies you’ve likely heard of.
BCE
BCE (TSX:BCE) is the highest-yielding stock on the TSX 60. It has an 8.92% dividend yield, which gives you a typical year’s return for the TSX in dividends alone!
A few months back, I had looked at BCE’s American equivalents, AT&T and Verizon, and concluded that they were buys. They were dirt cheap when I looked at them and offered yields comparable to BCE’s. Theoretically, BCE should be just as good as those stocks, as it is a Canadian telco, which means it is far more protected by government regulations than comparable U.S. companies.
Unfortunately, when I looked at BCE’s valuation, it seemed relatively pricey for a company with negative revenue growth and no earnings growth. It traded at 13.94 times trailing earnings as of last Friday’s close, and only very minor growth was expected for the year ahead. BCE’s dividend-payout ratio is also above 100%. The yield is enticing, but I would not expect this stock to deliver capital gains if historical trends persist.
Enbridge
Enbridge (TSX:ENB) is a Canadian dividend stock that got beaten down on some bad earnings releases. With a 6.5% dividend yield, it’s the second highest-yielding stock on the TSX 60.
Why is ENB so cheap? Put simply, its stock price has gone down while its dividends have gone up. The company spends a lot of money on dividends — more than it earns in profits — which means it has to borrow money to grow. It has been spending big money on pipeline replacements and was recently ordered by a U.S. judge to re-route one of its pipelines going through Wisconsin. That’s all been very costly.
However, ENB is a vital component of North American energy infrastructure, so it would probably get a bailout if it were ever at risk of sinking its ship completely. I’d say the dividend will continue being paid, but probably won’t grow at the frothy historical pace.
TC Energy
TC Energy (TSX:TRP) is a Canadian energy company like Enbridge. It has been performing somewhat better as a business than Enbridge has been: in the last 12 months, it grew its revenue by 6.4%, its earnings by 330%, and its operating cash flow by 14%. ENB’s revenue growth was negative.
TRP is partially a pipeline, but it also has power generation and green energy assets. So, it’s not exactly the same business as Enbridge. Trading at just 11.5 times earnings, it’s arguably a good value play, and you can’t argue with the 7.4% dividend yield. The balance sheet is “OK,” with a current ratio of around one and a slightly disappointing debt/equity ratio of two. On the whole, I’d probably be comfortable holding a small position in TC Energy.
