High yields can be highly lucrative but also invoke a sense of danger. It’s natural to wonder why these yields are so high, what factors influence them, and whether or not they impact dividend sustainability as well.
Image source: Getty Images
An energy company
Petrotal (TSX:TAL) is an energy company operating in the U.S. and Peru. It has production facilities in both countries and is also developing a new prospect in Peru. It’s a relatively small company with a market capitalization of $556 million. The footprint is equally tiny, but the production numbers are decent for a company this size.
Its current 14.9% yield is partly due to the 30% discount it is trading at and partly because of its generous payouts. It’s one of the highest yields among energy stocks right now. It’s worth noting that the company has only recently started paying dividends and has already slashed them twice.
On the positive side, the payout ratio is relatively stable at 58%. The company is also quite undervalued right now, considering its price-to-earnings (P/E) ratio of 3.6.
A tin mining company
Canada is home to some of the largest gold mining companies in the world and also has both deposits and companies focused on other metals. Among these illustrious metals, it’s easy to forget metal companies like Alphamin Resources (TSXV:AFM) with a different focus. This company produces tin and a lot of it.
This small-cap company is responsible for about 7% of the global tin supply. The most prevalent use of tin is to cover other metals to prevent them from corroding. It’s also gaining traction in the renewable industry due to its use in a new generation of solar cells (Perovskite solar cells).
This has been one of the reasons behind the stock’s impressive performance in the last five years—growth of about 590%. Interestingly, the company offers a mouthwatering 10.8% yield despite such explosive growth. The most significant reason behind this growth is the company’s recent doubling of payouts. The payout ratio is also rock solid at 39%. Hence, the dividends seem reasonably safe.
A mortgage company
High yields are not uncommon in small mortgage companies, but MCAN Mortgage (TSX:MKP) stands out in this niche crowd. This small mortgage company offers a generous 8% yield and has been growing its payouts for at least five years. The current payout ratio is rock solid at 15.6%.
The company’s history and financial sustainability endorse the safety of its dividends. It has also experienced a decent bullish run for a few years, but now that the company leadership is changing, it might be in for a correction phase. If that happens, you can lock in an even more generous yield.
Foolish takeaway
The dividends of at least two of the three high-yield stocks look reasonably safe. As for Petrotal, the most significant factor going against its dividend safety is the company’s history of slashing the payouts. Otherwise, it’s offering the most generous yield on this list. It’s also one of the two undervalued stocks on this list, MCAN being the other one.
