Income investors looking to get a little bit more passive income per month or quarter may wish to consider looking at some of the more generous dividend stocks out there.
Indeed, higher yields can be a red flag sometimes, especially when dealing with a pretty ugly stock chart. After all, having a high dividend yield isn’t any good if you’re just going to take a capital loss hit to the chin year after year. The key is going for generous dividend plays that are also reliable. Not only reliable enough to sustain their payouts in the face of industry headwinds and other pressures but reliable enough to raise their dividends over the long run.
Of course, it’s tough to catch a falling knife, and if the free cash flow payout ratio has swollen considerably in recent years, likely due to pressure facing a firm, there’s a chance that the elevated dividend yield you’re looking at will not be built to last. That is, of course, the firm under question can address headwinds hitting its business and get back on the earnings and sales growth track.
Not all fallen high-yielders are built to last!
So, if there’s a turnaround plan in place, then sure, it may be worth reaching for a higher-yielding despite the pressures its business has faced in recent quarters of years. That said, if there’s no realistic comeback plan in place or there’s been growing concern about a dividend’s sustainability, retirees may wish to avoid such plays as they could be much riskier than meets the eye.
Indeed, value traps are to be avoided at all costs. And for many retirees looking to get themselves a big, fat raise, it’s the super-high-yielders that can act as the most tempting (and dangerous) of value traps, especially if there’s a high risk of a dividend reduction within three years.
In any case, evaluating a firm’s comeback plan is critical because a dividend is only as strong as the cash flows that keep it up. Here’s one stock with robust cash flows and the means to grow its high-yield dividend further.
TD Bank
TD Bank (TSX:TD) shares are starting to get interesting again as they continue lagging the rest of the Big Six banks going into year’s end. Undoubtedly, it’s been all (or at least mostly) about the money-laundering penalties doled out in recent months.
Not only will TD Bank need to pay a great deal in penalties, but it will also see its growth in the U.S. market be capped by some amount for some time. Indeed, perhaps it’s TD’s limited runway for growth that’s the biggest concern for investors and analysts. After all, there’s only so much room to expand in the Canadian market.
In any case, I think there’s just too much pessimism surrounding the bank while it’s trading at $76 and change per share. Arguably, it’s the most hated Canadian bank right now. But with that comes an opportunity to snag a 5.3% dividend yield alongside a very muted multiple and some expectations, which, I believe, have been lowered to the floor.
The 5.3% yield may be historically swollen, but it’s well-covered by cash flows and looks poised to grow consistently over time. It will be interesting to see how the new incoming chief executive officer repositions the big bank after a forgettable 2024 marred by penalties and restrictions.
Between TD stock and GICs, which have lost some of their lustre following recent rate cuts, I think TD is the far better bet any day of the week!
