Passive-income investors should resist the temptation to seek out dividend stocks with excessive yields, especially if we’re talking about the types of firms that have yields that are skewing towards the extremely high end of the historical range. Why? Higher yields that are the result of a pressured stock may not be the most secure in the world, especially if we’re talking about a company that’s in a multi-year bear market of sorts.
Still, there are securities out there that have a high yield by design. REITs (real estate investment trusts), for instance, tend to have swollen yields. And with interest rates still relatively high, even after the latest round of Bank of Canada rate cuts, the pressure on REIT share prices isn’t anything that’s all too shocking, given their sensitivity to rate fluctuations.
With the Bank of Canada still poised to reduce rates, even in the face of 25% tariff threats, I’d argue that the REITs may be interesting pick-ups right here, provided you’re getting a resilient one with high-quality funds from operations (FFOs) and the ability to grow a distribution over time. Undoubtedly, you don’t want to rely on the hope for lower rates.
At the end of the day, rate moves can be tricky to predict. Tariffs could cause inflationary pressure, but, at the same time, the effect on employment could be pronounced enough to cause the Bank of Canada to hold off on rate hikes or even cut further. In any case, I wouldn’t bet on REITs or any other rate-sensitive income security to play where one thinks rates will be headed next. Instead, focus on the underlying business and its ability to continue paying dividends or distributions.
In this piece, we’ll look at a beginner-friendly name that yields more than 7%. While a seemingly high yield, it’s not all too absurd for these firms, which tend to have elevated yields (at least compared to most other names in the market) even in normalized environments.
Image source: Getty Images
Telus
Telus (TSX:T) stock tends to have a pretty sizeable yield at or around the 5% level. Today, it’s closer to 8% due to pressures faced by the telecom industry and rate-related headwinds. Indeed, the telecoms have faced a storm of late. But Telus’s payout, while stretched, looks as robust as ever. The company raised its dividend payout recently despite the headwinds.
As the company looks to shore up more cash, my guess is there are more dividend hikes coming, even if the stock fails to sustain a gain back above the $25 level. In any case, Telus stock is my favourite Big Three name to buy right here. I think it could have its way with its rivals, which should help offset the many macro headwinds hitting the industry of late. As a choppier ride, though, do be ready for short-term pain as you collect your dividends every quarter.
The bottom line
You don’t have to look all too far for high but well-covered yields. Whether you look at the hard-hit telecom scene or the REIT scene, be ready to play the long game with any income investment you pick up at these levels!
