A healthy risk tolerance is critical for almost all investors. But it’s easy to go overboard and place your bet on stocks that might be too risky. It’s more common with growth stocks than dividend stocks, but risky picks are present in both categories.
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Two risky dividend stocks
Algonquin Power & Utilities (TSX: AQN) is a risky dividend stock in Canada because, despite many predictions otherwise, it slashed its payouts a second time in just three years. The first cut was in 2023, and the second was in 2024.
The company was in significant financial trouble, which caused it to sell a substantial segment of its business. That, coupled with its dividend cuts, has alienated a lot of investors, and the stock has lost about two-thirds of its market value from its 2021 peak.
Unlike Algonquin, the real estate investment trust (REIT) SmartCentres REIT (TSX: SRU.UN) hasn’t slashed its dividends yet, but there was a trouble sign a few years earlier when the REIT stopped growing its payouts.
The second danger sign is the incredibly high payout ratio to adjusted funds from operations (AFFO) of 98.8% in the last six months. Surprisingly, it was even higher before, and it’s impressive that the REIT has managed to sustain its payouts. But without a significant income influx, the dividends might become too costly.
Now, let’s take a look at some safe dividend stocks.
A utility stock
Finding safer dividend stocks than Fortis (TSX: FTS) on the TSX can be challenging. The utility company caters to millions of utility customers (electricity and gas) through 10 different operations in multiple markets. It is operationally relatively safe. About 99% of its utility assets are regulated, leading to highly reliable and consistent revenues.
This has allowed the stock to sustain and grow its payouts for decades. It has been increasing its payouts for 49 consecutive years and is just one year away from becoming Canada’s second Dividend King.
The 3.9% dividend yield is decent enough for such a prestigious Aristocrat. It’s also a modest grower, though the last five years’ performance doesn’t reflect that.
A mortgage company
The Canadian bank stocks are among the top choices for investors looking for safe dividends in the financial sector, but they aren’t the only ones. First National Financial (TSX: FN) is an independent mortgage company, one of the largest mortgage servicing companies in the country apart from the banks that dominate this space. It’s also a well-established Aristocrat.
It’s not just the stock’s stellar dividend history that makes it a compelling and safe dividend pick but also the financial sustainability of its payouts. The payout ratio is generally quite safe (64% at the time of writing this), and the company raises its payouts at a conservative rate every year.
This makes the dividend growth quite sustainable in the long term. It’s also offering a generous 6.3% yield, combining safety with solid return potential.
Foolish takeaway
It would be wise to stay away from risky dividend stocks, even though SmartCentres’s generous yield and Algonquin’s dividend-growth potential might tempt you. The two safe stocks are significantly brighter picks in comparison. Fortis even offers a more holistic return potential than just secure and stable dividends.
