Chasing yield can be dangerous for new passive-income investors who don’t quite know what they’re getting into. Undoubtedly, the magnitude of risks can surge higher when one goes for those ultra-high-yielders (think the dividend stocks that yield a few percentage points more than they typically do).
That said, not every dividend play with a yield north of 5-6% is destined to end in tears for shareholders. Indeed, there are some trade-offs that must be made when one decides to go for those heftier yields, and it doesn’t always have to come in the form of higher downside risk or more elevated levels of volatility. Often, the higher yield can come at the cost of share price appreciation.
As you may know, some of the higher-yield heavyweights have share prices that don’t appreciate nearly as much as the broad S&P 500 or TSX Index. Indeed, this is pretty natural, given that more cash in the pockets of shareholders on a quarterly or monthly basis means less to invest in cash flow-boosting projects.
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A safe 7% yield is great, but don’t expect big gains!
For instance, a 7% yield can be safe, sound, and well-supported. But just don’t expect capital gains that are remotely like the broad stock market. Indeed, it would be nice if shares of a 7% yielder (or more) were to return 10% in share price appreciation in any given year. However, for the most part, investors should have lower expectations for capital gains.
A 7% yielder could return next to zero in share price appreciation and still be a fairly decent play, provided the dividend stays intact. In this piece, we’ll look at a pair of 7%-yielding investments that I view as great bets as we head into the month of August.
Over the past 10 years, shares haven’t really seen all too much in the way of appreciation. In fact, shares of both firms are actually in the red over the past decade, at least at the time of this writing. In any case, the road behind may not look like the road ahead for these mega-yielders, especially as interest rates come down and the industry environment looks to improve for a change. At the end of the day, lower rates mean a bit more financial flexibility to pursue growth opportunities and pay a bit more to shareholders in the form of distributions or dividends.
SmartCentres REIT and Telus: A 7%-yielder combo worth checking out
Shares of battered telecom firm Telus (TSX:T) have a massive 7.61% yield at the time of writing after falling around 35% from its 2021 high. Indeed, industry headwinds prevail, but the payout, I think, looks much safer than most other dividend plays with yields over 7%. Looking ahead, look for Telus’s fat, healthy dividend to not only stay strong in the coming four years or so, but it may have room to grow if Telus’s cost-cutting efforts lead to greater financial flexibility.
Additionally, SmartCentres REIT (TSX:SRU.UN), though not a stock, is a fantastic addition to a 7%-yielding portfolio. The payout is hefty at 7.23% and with a high occupancy rate, the distribution looks profoundly safe, even if a recession were to hit in the next quarter. Of course, Smart isn’t the growthiest REIT in the world, but it does have an intriguing development pipeline that could help fuel a rally in further distribution raises in the future.
