2 High-Yield (But Slightly Risky) Stocks to Keep Your Eye on

These two dividend stocks certainly come with a fair share of risk. But the passive-income rewards could be worth it.

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High-yield stocks can be a real gem in your investment portfolio, even with the risks involved. These offer steady income, especially useful during market downturns when capital appreciation might be slow. Plus, if you’re a dividend investor, you’re getting paid to wait while these stocks hopefully appreciate in value. Sure, there are risks, like dividend cuts or price volatility. But with careful research, you can find reliable companies that balance risk and reward, thus giving you that extra income boost without too much stress!

Melcor REIT

Melcor REIT (TSX:MR.UN) is a real estate investment trust (REIT) that’s caught the attention of dividend-focused investors, offering a hefty yield of 16.72%! Its portfolio consists mainly of retail and office spaces, providing a stable stream of rental income. The big reward here is that high dividend yield, which is attractive for income seekers. With a low price-to-book ratio of 0.29, it’s also seen as undervalued, thus presenting potential upside if the market starts to recognize its worth.

However, there are significant risks to keep in mind. The REIT has a high payout ratio of 800%, meaning it’s distributing far more than it earns. This raises concerns about the sustainability of those juicy dividends. Additionally, its debt-to-equity ratio is quite high at 206.96%, signalling that the company is heavily leveraged.

Looking at recent performance, Melcor’s quarterly earnings grew by 46.1% year over year, which is encouraging. However, revenue has slightly declined by 1.5%. With a forward price-to-earnings (P/E) ratio of 7.51 and a trailing P/E of 5.14, Melcor appears reasonably valued. The risks around debt and payout sustainability should be on your radar if you’re considering this high-yield opportunity.

SmartCentres

SmartCentres REIT (TSX:SRU.UN) is a prominent player in the Canadian real estate market, known for its portfolio of retail-focused properties, many of which are anchored by Walmart. Its appeal lies in its reliable income stream, as evidenced by a solid forward annual dividend yield of 6.82%. This makes it attractive to income-focused investors looking for steady payouts. With a price-to-book ratio of 0.88, it’s trading below its book value. This can signal a potential buying opportunity for those seeking undervalued assets.

On the flip side, there are some risks to consider. SmartCentres has a payout ratio of 112.74%, which means it’s distributing more in dividends than it’s currently earning. This raises concerns about the sustainability of its dividend if earnings don’t improve. Additionally, the REIT’s debt-to-equity ratio sits at 80.88%, reflecting a high level of leverage.

In terms of performance, SmartCentres generated nearly $940 million in revenue over the last year, with a solid operating margin of 57.33%. However, its quarterly earnings dropped by 23.2% year over year, a red flag for potential investors. Despite the risks, the REIT’s diverse property portfolio, combined with its reliable tenants, offers stability in uncertain times, thus making it a worthwhile consideration for long-term dividend investors willing to accept some bumps along the way.

Bottom line

High-yield stocks, like Melcor REIT and SmartCentres, can be appealing for dividend-focused investors looking for steady income, but they come with risks. Melcor REIT boasts a massive 16.72% yield and appears undervalued with a low price-to-book ratio. Yet its high payout ratio and debt levels raise concerns about dividend sustainability. SmartCentres, known for its Walmart-anchored retail properties, offers a solid 6.82% yield. Yet its payout exceeds earnings, and recent earnings performance is shaky. Both REITs present potential upside, but investors should carefully weigh the risks before diving in.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has positions in Walmart. The Motley Fool recommends SmartCentres Real Estate Investment Trust and Walmart. The Motley Fool has a disclosure policy.

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