With high yield comes high risks, or does it? At times, the market panic sells following the herd mentality, pulling down stock prices of some fundamentally strong companies. This creates an opportunity to buy strong stocks at a cheaper price. However, not all high-yield stocks are a buy. The market might have analyzed the increased risk of sustaining dividends correctly, causing the stock price to fall and dividend yields to rise.
Image source: Getty Images
Identifying ultra-high-yield stocks to buy hand over fist
Yield is the annual dividend per share as a percentage of the stock price. When the stock price falls, you can lock in the same dividend per share at a discounted rate. I have identified two stocks still trading way below their average and offering a high dividend yield.
Telus stock
Telus Corporation (TSX: T) is among the top three telcos that saw a pullback in the last two years due to sector headwinds. The sector consolidation of Rogers Communications with Shaw Communications put Telus and BCE in a price war, which was not welcoming for Canadian investors. I believe this promotional activity was to take advantage of Rogers’s situation, which was busy integrating Shaw, and capture as many customers as possible.
The price war comes as telcos have been spending billions on rolling out 5G infrastructure amid high interest rates. Telus reported a 37.5% dip in first-quarter net income, primarily because of an increase in its interest expense. In addition, the regulator forced BCE and Telus to give competitors access to their infrastructure.
All the above factors weighed down on their return on investments. The first interest rate cut by the Bank of Canada in June has revived hopes of economic recovery. Moreover, the two telcos have paused their price wars and increased the price of their cheapest main brand by about $5 per month.
The second quarter results could shed more light on the road ahead and drive the stock price upwards. Telus stock has recovered 6.4% in July but is still trading 37% below its average trading price of $28. Now is a good time to buy the stock and lock in a yield of over 7%. Telus has also increased its annual dividend by 7% in 2024 and expects to retain this growth rate next year.
CT REIT
CT REIT(TSX: CRT.UN) is at a sweet spot under the cover of its parent, Canadian Tire. The REIT has minimal debt, and most of it is unsecured debentures. With debentures, you can keep renewing by paying down old ones and issuing new ones. Since its property portfolio comprises Canadian Tire stores, the REIT can find investors for its debentures.
The REIT also enjoys smooth rental income cash flows from its 99.5% occupancy. The trust pays out 73.1% of its funds from operations as distributions, a safe percentage to sustain the dividends. It is also among the few REITs that increase its distributions annually by 3%, and it did so this month. Its unit price recovered 8% in July but is still trading 13% below its average trading price of $16.35. Now is a good time to lock in a 6.5% yield.
An Ultra High-Yield Dividend Stock to Avoid
I would avoid all pure-play commercial REITs, including True North Commercial REIT (TSX: TNT.UN). The world has changed for them with the emergence of the work-from-home trend. After the 2008 housing bubble burst, companies became cautious about real estate spending, giving rise to shared office spaces. The pandemic has made companies more cautious about office space, and they are leasing smaller offices, consolidating their branches, and investing in virtual offices.
True North Commercial REIT has been offloading properties, reducing its portfolio from 46 to 40. These REITs are hanging on to the cliff to survive.
