You often see dividend stocks that do not give capital growth. However, if you buy the stock near its dip, then you can benefit from the recovery rally. Playing out on this logic is a small-cap lending stock that has just begun its recovery. Timbercreek Financial (TSX:TF) provides short-term mortgages to REITs. Its share price is heavily influenced by the Bank of Canada’s interest rate decisions. This hidden gem is set for recovery after a challenging three years of accelerated interest rate hikes and cuts.
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Why is this hidden gem stock set for explosive growth?
Timbercreek’s business model is quite straightforward. It earns in two ways: interest paid on loans and loan processing fees. The REIT takes bigger and cheaper loans and lends them at a higher rate to REITs. The higher the gap in interest paid and received, the higher the income for Timbercreek.
Think of it like a carriage where the loan sits, and the interest rate is the wheels. The wheels keep running, and the loan portfolio stays untouched. When the interest rate is too high, Timbercreek earns windfall interest. However, that slows the speed of the carriage as not many REITs can afford the high interest. REITs pause their development plans and repay the debt to save on interest expense.
The fall
That is exactly what happened between April 2022 and October 2023 when the Bank of Canada hiked the rate from 0.25% to 5%. Hence, you see Timbercreek Financial’s stock price fell more than 33% during that time, even when the lender gave a special dividend.
The surge
The next growth cycle came between October 2023 and October 2024, when TF stock surged 34% as the Bank of Canada paused rate hikes and then began rate cuts. There were hopes that the rate cut could revive lending activity. While the interest income will be reduced, so will the interest expense, and the processing fee will grow as more REITs take loans.
The V-shaped recovery of this stock
However, the recovery was slow as the real estate market took time to recover, and REITs also held back lending, waiting for the rates to fall further. In response, Timbercreek stock fell 24% between November 2024 and March 2025. Now, the Bank of Canada kept the interest rate unchanged in April. With no more rate cuts in sight and uncertainty around tariffs over, lending momentum could pick up.
Timbercreek Financial’s stock price has surged 18% since April 4, and there is more upside of 10–12% as the lending recovers. First-quarter earnings showed a slight recovery in loan turnover as its net mortgage investments grew 10.3% year-over-year to $1.1 billion. The slowdown in economic growth could delay the rally, but exponential growth is in the cards in the medium term.
Is the 9.5% yield sustainable?
Timbercreek Financial has been paying a monthly dividend of $0.0575 since 2016, using the interest income, which is distributable after deducting interest costs and other expenses. The falling interest income and a slightly slower processing fee growth saw its dividend as a ratio of distributable income increase to 92.8% in the March 2025 quarter from 88.3% in the December 2024 quarter.
This is probably the bottom for Timbercreek Financial. From here onwards, earnings will improve, making the 9.5% yield sustainable. However, investors should note that Timbercreek is a small-cap stock and may not enjoy as strong of trading volumes and liquidity as a large-cap stock. Invest only the amount you don’t want to use for a year or two in Timbercreek Financial.
