Canada is home to a surplus of dividend stocks. While there are many, not all dividend stocks are built the same. Canadian dividend stocks have a wide level of quality and sustainability. As a result, investors need to be choosey about the dividend stocks they own in their portfolio.
Some dividend stocks are facing serious balance sheet and business challenges. While they may have big yields, they are best avoided. Here are two dividend stocks to avoid and two to buy today.
BCE: Big dividend, but big risks
BCE (TSX: BCE) trades with a massive 9.2% dividend yield. Certainly, that yield looks appealing, but investors need to be cautious. That yield has only gotten larger as the stock has continuously dropped in 2024.
BCE is facing several headwinds. First, its balance sheet has ballooned with debt from aggressive infrastructure investments. Right now, its dividend is neither sustained by earnings nor free cash flow.
Second, increased competition is putting pressure on pricing across the telecom sector. Lastly, Canadian regulators have been pressuring for more competition and lower prices. This is making investment returns much lower.
Overall, the headwinds stack up. The risks are increasing that the dividend could be cut for this stock, and you don’t want to hold the bag when it does.
AQN: Still in turnaround mode
Algonquin Power (TSX: AQN) was once considered a premium Canadian dividend stock. However, a string of bad investments and management hiccups have resulted in the stock declining 56% in the past three years.
Due to a weakening balance sheet with significant variable rate debt exposure, the company had to cut its dividend last year. Its yield has climbed back up to 7% today. To improve its balance sheet, the company has become a forced seller of assets. Several sale valuations have come below the market’s expectations.
Once it reorganizes, stabilizes, and finds a better strategy, this may be a decent dividend stock. Yet, I wouldn’t touch it until the turnaround is complete.
PPL: Safe and steady dividend stock
If you are looking for a steady and solid dividend stock, Pembina Pipeline (TSX: PPL) is an attractive option. It yields 5.5% today. Pembina is a major energy infrastructure provider in Western Canada. It provides crucial collection and egress pipelines, as well as a mix of midstream, storage, and export facilities.
Pembina’s dividend is protected by its contracted base of assets. These generate stable cash flow for the business. Strong free cash flow generation has helped Pembina maintain a very strong balance sheet.
As a result, it is in a good position to invest into new growth projects (including its recently announced Cedar LNG project). That growth could result in solid dividend growth in the coming years.
GRT.UN: A dividend stock with material upside (and nice yield)
Granite Real Estate Investment Trust (TSX: GRT.UN) is a large industrial property owner across Canada, the United States, and Europe. Recent stock performance has been lacklustre. The stock is down 21% in the past three years. This has largely been due to the rapid rise in interest rates.
With that trend reversing (and rates dropping), Granite could enjoy a nice stock recovery. Granite has been delivering solid high single digit adjusted funds from operation (AFFO) growth over the past few years. Demand for high-end industrial real estate remains strong and is supporting good rental rate growth.
Granite has a market-leading balance sheet, and its monthly distribution is very sustainable. Today, it has a 4.8% distribution yield. This dividend stock trades at a large discount to its private market value. You may have to be a bit contrarian, but this stock could really reward in the next year or so.
