Should You Buy This TSX Dividend Stock for Its 13% Yield?

This dividend stock sure does look enticing with a sky-high dividend, but that could also come with other sky-high valuations.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published September 24, 2024 8:30 pm EDT

While a high yield on TSX dividend stocks can be tempting, it’s not always the golden ticket to a fruitful investment. A sky-high yield might signal underlying issues, such as a struggling business or a potential cut in dividends. This can leave investors holding a bag of disappointment. That’s why instead, focusing on sustainable, well-managed companies with a history of steady growth often leads to more satisfying and reliable returns. But, what if you could have it all?

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The hunt

When hunting for the perfect high-yield dividend stock, it’s essential to look beyond just the eye-catching yield percentage. Start by checking the company’s financial health. A strong balance sheet, consistent earnings, and healthy cash flow are good indicators that the company can maintain or even grow its dividend over time. You’ll also want to assess the payout ratio. This shows what portion of earnings is paid out as dividends. A ratio that’s too high might mean the dividend is at risk if the company faces tough times. While a balanced ratio can give you peace of mind.

Next, don’t forget to consider the company’s track record of dividend payments. Companies that have consistently raised their dividends over the years tend to be more reliable. Therefore, they are less likely to cut back when times get tough. Plus, understanding the industry the company operates in can provide context. Some sectors are more stable than others. By taking a well-rounded approach and focusing on sustainability, you can enjoy the juicy dividends without the worry of unexpected surprises!

TNT REIT

True North Commercial REIT (TSX: TNT.UN) is therefore a strong option. It specializes in the niche market of single-tenant properties, primarily leased to the Canadian government and other creditworthy tenants. This means it’s not just about collecting rent. It’s focused on providing secure and stable returns by investing in high-quality, strategically located properties. This model allows TNT real estate investment trust (REIT) to maintain a solid income stream. All while minimizing the risks often associated with commercial real estate.

What sets TNT REIT apart is its commitment to long-term leases, often spanning many years. This not only ensures a steady cash flow but also provides a cushion against market volatility. So, is it still valuable?

Current worth

Based on its current valuations, TNT REIT presents a mixed bag for investors considering its value. With a market cap of approximately $189 million and a trailing price/earnings (P/E) ratio of 19.2, it’s not exactly screaming “bargain!” compared to other options in the market. However, the low price-to-book ratio of 0.43 suggests it might be undervalued relative to its net assets. But here’s the catch, a hefty enterprise value of $949.2 million paired with a negative earnings before interest, taxes, depreciation and amortization (EBITDA) shows that the REIT is facing some challenges – potentially making investors think twice about its long-term growth prospects. And with the stock recently trading down 6.1% over the past year, the road ahead may not be smooth sailing.

Yet for risk-takers, there’s the dividend. TNT REIT offers a forward annual dividend yield of 13.1%! But before you get too excited, the payout ratio of 640.8% raises a big red flag. This indicates that the dividends are being paid out at a rate significantly higher than the company’s earnings, which isn’t very sustainable. So while the dividend might be rich today, it’s crucial to consider whether it’s backed by reliable cash flow and profitability. With a profit margin down 39% and a concerning total debt-to-equity ratio of 175.7%, it looks like investors should tread carefully. In short, TNT REIT may have some attractive qualities. Yet it’s essential to do your homework and weigh the risks before diving in!

Bottom line

In a nutshell, TNT REIT boasts an eye-catching dividend yield of 13.1%, yet the staggering payout ratio and negative profitability suggest that this sweet treat might not be sustainable in the long run. With a mix of attractive valuations and concerning financial metrics, it’s a stock that could use a bit more scrutiny before you dive in. But if you’re willing to take a risk, it offers a strong dividend for passive income seekers.