Dividend stocks are a good way to start paying yourself a fixed amount every month. The extra cash from investment income can help you fill the gaps in retirement or fight inflation when your monthly paycheque is not enough. Growth stocks may not be an ideal choice for crises or emergencies, as their performance is linked to the economy. However, you can rely on dividend stocks for that rainy day. Here is a 10.6% dividend stock that can give you cash every month.
Bull case for this 10.6% dividend stock
With a $537 million market cap, Timbercreek Financial (TSX:TF) is a small-cap stock trading on the TSX stock exchange. Small-cap stocks are highly volatile but also offer higher returns.
Timbercreek Financial is a short-term mortgage lender. It has a mortgage portfolio of $1.5 billion, with an average mortgage size of $15.1 million. This hints that it has a diversified client base across 100 mortgages. It earns a weighted average interest rate of 8.9% from this portfolio.
It mostly lends to commercial REITs to develop, buy, or enhance income-generating properties. Around 60.1% of its portfolio has been mortgaged to multi-residential, 9.9% to retail, 6.4% to office, and the remaining to land and industrial.
Tapping into the pulse of Canada’s real estate market, retail and residential REITs have recovered after the interest rate cuts began in June 2024. However, office REITs still struggle due to the hybrid work environment and cost-cutting.
During the high-interest-rate environment, all REITs stalled their development plans and repaid a good portion of their debt to cut finance costs. While the high interest rates improved Timbercreek’s interest income (10% portfolio yield), its credit utilization rate fell drastically to 78.7% in 2023 from 85.1% in 2022. This means the lender was sitting on idle cash, which earned no interest.
However, things improved in the second half of 2024. Its overall credit utilization rate improved to 89.5%, indicating that lending activity has normalized. While interest income has decreased, more loan originations will drive the revenue.
Bear case for this 10.6% dividend stock
Timbercreek Financial is a high-return stock, but it also carries high risk. For instance, the company made a provision of $16.1 million for Expected Credit Loss (ECL) in 2024, which accounts for 2.2% of the net mortgage and other loan portfolio. It’s the highest ECL rate to date for the lender. Behind the high ECL are the two Calgary office mortgages that makeup Timbercreek’s entire office mortgage portfolio.
However, ECL was partially offset by the sale of a stage loan asset for $1.5 billion. Moreover, a decrease in interest rate also meant a 28% lower financing cost for Timbercreek.
To break it down in simple terms, Timbercreek Financial funds the loans through equity and debt. When the interest rate falls, the financing cost and interest income of its loan portfolio fall. Hence, there is little to no impact on the lender’s profit margins.
Timbercreek Financial’s fundamentals seem to have bottomed out, with 2024 net income down 30% to $46.2 million. However, the ECL did not affect its distributable cash flow. Thus, its dividend payout ratio was at 88.3% in 2024. From this point, the ratio will likely improve as real estate development has gathered pace and lending activity has normalized.
How much cash can you earn every month from a $5,000 investment?
Now is a good time to buy Timbercreek Financial stock as it trades at a 27.6% discount from its book value per share of $8.27. Thus, the yield is 10.6%.
A $5,000 investment can buy you 771 shares of Timbercreek Financial, which pays $44.30 in cash every month. This equates to $531.99 in a year and $5,320 in 10 years.
You could consider building three to four monthly cash sources in the current bear market.
