Success comes when preparation meets opportunity. If you have $10,000 prepared to invest, now is the time to lock in a 9.5% yield in a stock that offers a dividend-reinvestment plan (DRIP). The stock in question is Timbercreek Financial (TSX: TF). This small-cap, high-yield dividend stock is at an attractive price point.
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This dividend stock is on a cyclical point
Timbercreek Financial offers short-term mortgages to commercial real estate investment trusts (REITs) for buying or developing new properties. It provides immediate funds till their bank loans are sanctioned. The company is sensitive to interest rates. When interest rates rise, it earns higher interest income. After a point, its loan turnover declines as REITs postpone their development projects until they get favourable interest. The risk of default also increases. Hence, the stock price of Timbercreek Financial has fallen 24% since April 2022.
However, the lender rewarded shareholders with a bonus dividend as it earned 10% interest on its loan portfolio in 2023. The year 2024 is a turning point for Timbercreek Financial. Its loan turnover fell in the last two quarters as many borrowers repaid their loans to reduce their interest expenses. The volume of new loans also fell, reducing the processing fee and interest income.
Hence, its first-quarter dividend payout was 99.7% of earnings per share but 90.6% of the distributable income. Such a high payout ratio is not sustainable as it puts pressure on the company’s cash flow. Before high interest rates could do more harm, the Bank of Canada cut interest rates. Timbercreek Financial is at an attractive cyclical point as lower interest rates will help the lender increase its loan turnover and processing fees.
Invest $10,000 in this dividend stock for a $1,900 annual passive income
The time is ripe to invest a lump sum in Timbercreek Financial as the stock trades at a 25% discount from its peak. A $10,000 investment can buy you 1387 shares at $7.2 per share, lower than its average share price of $9.5.
The lower share price has also inflated its dividend yield to 9.5% against the five-year average of 8.3%. If you lock in a higher yield and put this investment on an auto mode of compounding through a dividend-reinvestment plan (DRIP), you can boost your passive-income portfolio.
| Year | TF Share count @$9.5/share | TF Share count | TF Dividend per share | TF dividend |
| 2024 | 1387 | 1387.0 | $0.69 | $957.03 |
| 2025 | 101 | 1488 | $0.69 | $1,026.54 |
| 2026 | 108 | 1596 | $0.69 | $1,101.10 |
| 2027 | 116 | 1712 | $0.69 | $1,181.07 |
| 2028 | 124 | 1836 | $0.69 | $1,266.86 |
| 2029 | 133 | 1969 | $0.69 | $1,358.87 |
| 2030 | 143 | 2112 | $0.69 | $1,457.57 |
| 2031 | 153 | 2266 | $0.69 | $1,563.43 |
| 2032 | 165 | 2430 | $0.69 | $1,676.99 |
| 2033 | 177 | 2607 | $0.69 | $1,798.79 |
| 2034 | 189 | 2796 | $0.69 | $1,929.44 |
The 1,387 TF shares in your portfolio can earn you $957 in annual dividend income. A reinvestment of this amount at $9.5 per share will add 101 TF shares to your portfolio next year. You will get $1,026 in dividends from 1,488 TF shares. Since the company is issuing you DRIP shares, you also save on brokerage. And if you invest through a registered savings account, you can also save on the dividend tax as they let your investments grow tax-free.
If everything remains constant — the average share price remains $9.5, the DRIP continues, and the annual dividend per share remains $0.69 — this compounding can grow your passive income to $1,900/year by 2034.
Investing tip
The above table is just a rough calculation where I compounded dividends annually. In reality, TF compounds dividends monthly. Moreover, the stock will take at least another year to reach the $9.5 share price. That means the actual result could be higher. However, it is always better to keep a conservative estimate as unforeseen events could impact TF’s future performance.
Most analysts update their financial models to adjust for the new developments in the assumptions. You can make a separate column to input actual numbers against the forecast. If Timbercreek Financial increases or decreases its dividend per share, you can adjust the forecast table for the following years accordingly. Even if you review your portfolio once a quarter, you can stay in control of your investments.
Some events lead to the dissolution of a company. Like TransAlta Renewables merged with its parent owing to the high debt burden. If you invested in the stock for its high yield, there is no motivation to hold it anymore. Hence, many shareholders sold it and switched to other stable dividend stocks. Keep investing and diversifying your portfolio across various stocks.
