Investors, particularly those with little investing experience, might be mesmerized by high yields. However, we all know not to chase yields. I’m going to go through a couple of popular stocks with high yields today and rate whether they are a buy, sell, or hold.
This high-yield stock yields 8.5%
As one of the Big Three Canadian Telecoms, BCE (TSX:BCE) enjoys an oligopoly environment. It’s a large-cap stock with a market capitalization of close to $43 billion. BCE has increased its dividend for about 15 consecutive years with a 1-, 3-, 5-, and 10-year dividend growth rate of just north of 5%. So, historically, it has delivered very consistent dividend growth.
Since the stock started selling off from higher interest rates in 2022, at $47.03 per share, it now offers a massive dividend yield of close to 8.5%.
Looks too good to be true, doesn’t it?
A closer look reveals that its last dividend hike in February was 3.1%. So, its dividend growth might be slowing down. It makes sense. Its payout ratio has been extended since 2020. The trailing-12-month payout ratio was 174% of earnings!
Moreover, its adjusted earnings per share is only 7% higher than a decade ago. So, it seems like it has trouble growing on a per-share basis. And the stock is fairly valued.
In other words, here’s a high-yield stock that has an extended payout ratio and no margin of safety. Conservative investors should not hold the stock.
This big-dividend stock yields 6.9%
Enbridge (TSX:ENB) is another large-cap stock that has slowed-down growth and resulted in valuation compression over the years. As a result, its dividend yield has also risen as it continued to raise its dividend.
Enbridge stock has a market cap of close to $116 billion. Its dividend growth streak is longer at about 28 consecutive years. Its 10-, 15-, and 20-year dividend growth rates were around 11%. This rate has shrunk to about 3% in recent years.
Like big telecoms, the energy infrastructure company also borrows a lot of debt to grow its assets. So, higher interest rates have been detrimental in its growth.
Although Enbridge stock is also fairly valued, it offers better coverage for its dividend because it uses the distributable cash flow (DCF) instead of earnings for its payout ratio. It targets a payout ratio that’s 60-70% of its DCF.
Because there’s little margin of safety in the stock, I would rate it as a “hold” for investors who want current income. At the recent quotation of $53.15 per share, Enbridge stock provides a dividend yield that’s almost 6.9%.
Foolish investor takeaway
Investors should avoid chasing high yields, which typically have a higher chance of cutting their dividends. Instead, invest early in dividend stocks that offer lower yields but higher growth. Ultimately, growth paid at a reasonable price leads to better long-term total returns.
Between BCE and Enbridge, I believe Enbridge stock is a better buy. Investors looking for a safer entry point can consider a target buy price of $50 or lower.
