2 High-Yield (But Slightly Risky) Stocks to Keep Your Eye On

Income investors may want to keep an eye on two high-yielding stocks but should be conscious about the inherent business risks.

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Market analysts believe the start of the rate cuts is go-time for dividend investing. The allure to earn passive income has heightened immediately after the much-awaited move by the Bank of Canada.

Among the generous dividend payers to watch are Laurentian Bank (TSX:LB) and Transcontinental (TSX:TCL.A). However, both high-yield stocks are slightly risky after their most recent quarterly results missed expectations.

Strategic revamp

Laurentian Bank is outside the Big Six circle, but its dividend offer is much higher than its larger industry peers. At $25.13 per share, you can partake in the over-the-top 7.4% dividend. However, this small-cap stock underperforms, with a 6.8% year-to-date loss.

In Q2 fiscal 2024 (three months ending April 30, 2024), the $1.1 billion lender reported a $117.5 million net loss compared to $49.3 million in net income in Q2 fiscal 2023. Revenue declined 1.8% year over year to $252.6 million, while provision for credit losses increased 10.5% to $17.9 million from a year ago.

Nonetheless, its President and CEO, Eric Provost, said, “The bank maintained a strong and prudent liquidity position and remains well capitalized in light of continuing macroeconomic headwinds.”

According to Provost, Laurentian Bank will launch a new strategic plan to make the company stronger, sustainable, and more profitable. Management will refocus and position LB as an alternative bank for young and middle-class customers who are underserved or underappreciated by rivals.

“Commercial banking will remain the bank’s growth engine, and we will grow market share in personal banking by introducing new, low-cost, value-add products to attract new customers and increase deposits while simultaneously simplifying our offering,” Provost added.

As part of a strategic revamp, the bank will reduce manpower, move towards a hybrid work model, and implement cost-saving measures. Laurentian Bank intends to lure new customers with self-serve banking capabilities and new technologies. It also expects to save C$5 million annually with the termination of leases in the building.

Laurentian Bank was on the selling block recently but found no buyer. Given the 52.7% payout ratio, the quarterly dividends should be safe for now.

Solid growth driver

Transcontinental is up 9.6% year to date, and at $14.53 per share, the dividend yield is 6.7%. The $1.3 billion company is a fixture in North America’s flexible packaging industry and Canada’s largest printer. However, the top and bottom lines declined in Q2 fiscal 2024.

In the three months ended April 28, 2024, revenue and net earnings fell 8% and 28.4% to $683.2 million and $15.9 million versus Q2 fiscal 2023, respectively. Its President and CEO, Thomas Morin, said the company is working to improve its product mix toward higher-value products while pursuing cost reduction initiatives with determination.

Management is confident that investments in the packaging sector, including those related to sustainable packaging solutions, will position Transcontinental for the future and should drive business growth.

Invest with caution

Laurentian Bank and Transcontinental are cheap, lucrative options for income-focused investors. An improved economic environment could result in a turnaround for the respective businesses. Meanwhile, understand the inherent risks before investing in one or both.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Laurentian Bank of Canada and Transcontinental. The Motley Fool has a disclosure policy.

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