The last three years have been a testing ground for dividend stocks. Several real estate and renewable stocks slashed their dividends, and two pureplay commercial REITs suspended dividends. It was a tough call to make as businesses struggled to sustain the whirlwind of demand and rapid surge in interest rates from 0.25% to 5%. It is not easy to manage debt in such an environment.
Even dividend aristocrats like Enbridge and TC Energy slowed their annual dividend growth from 10% and 7%, respectively, to 3%. Yet a few dividend stocks maintained their payouts despite some stress on cash flows.
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Three reliable dividend stocks with an over 7% yield
Every company felt the heat of the pandemic and interest rates. But a few companies either absorbed these surprises or benefited from them, which helped them sustain their dividend policy.
Timbercreek Financial stock
Timbercreek Financial (TSX: TF) was both at an advantage and a disadvantage from rising interest rates. The short-term mortgage lender for commercial REITs reported the best year in terms of interest income in 2023. The increasing interest rates helped it earn a 10% yield on its loan portfolio. The company even declared a bonus dividend.
However, high interest also increases credit risk. Since Timbercreek only loaned to income-generating REITs, more borrowers repaid loans to cut down their interest expense, reducing Timbercreek’s loan turnover. The company maintained its dividend payout ratio at 87.8% of the distributable income in the June 2024 quarter.
Loan demand started picking up in the second half of the year after the Bank of Canada announced three rate cuts. The stock is still trading at a 13% discount from its average trading price of around $9.50 and has a dividend yield of 8.4%.
Timbercreek Financial gives monthly payouts and doesn’t grow dividends. With new loans coming in, the revenue from processing fees will increase. Even if the interest income reduces, it would be in line with the 2021 levels. A $5,000 investment today can buy you 609 shares of Timbercreek Financial for $8.20 a share. These shares can provide annual dividends of $420.
Slate Grocery REIT
Slate Grocery REIT (TSX: SGR.UN) has maintained steady dividends as the business was unaffected by the pandemic. This pureplay grocery REIT enjoyed a high occupancy rate and business as usual that helped it earn regular rent and pass it to unitholders.
The REIT did face the heat from rising interest rates, which increased its payout ratio to as much as 81.1% in the December 2023 quarter. However, things have improved as the REIT renewed rent at a 10% spread and reduced its payout ratio to 74.2%. Even though the REIT doesn’t grow dividends, it pays them in US dollars. Canadian investors see fluctuation in the dividend amount depending on the exchange rate.
The REIT’s unit price has recovered. It is now trading near its pre-pandemic level of $14.15, with an annual dividend yield of 8.4%. A $5,000 investment today can buy you 353 units of Slate Grocery REIT and provide annual dividends of $420.
Telus stock
The telecom sector benefitted from the pandemic as digital adoption increased. However, these companies were affected by high interest rates as the entire sector’s debt exceeded their target range because they invested heavily in 5G infrastructure. While BCE slowed its dividend growth rate from 5% to 3%, Telus Corporation (TSX: T) maintained the growth rate and had a payout ratio of 83%.
As interest rates fall, Telus could see an ease in interest expense. Moreover, the rollout of 5G is opening new avenues to earn revenue through higher subscriptions. There is growth potential as the Internet of Things and artificial intelligence at the edge increase the number of devices connected to the Internet and cloud.
Telus stock price is still trading at a 25% discount from its average trading price of $30 and has an annual dividend yield of 6.9%. A $5,000 investment today can buy you 221 shares for $22.56 per share. These shares could provide annual dividends of $362 if the company increases its dividend by 3.5% semiannually next year.
