A high dividend yield can seem like the perfect scenario. Even if shares go up or down, investors are still getting dividend income each and every month! It’s a huge win, or so it seems.
But many dividend yields can be a trap, with yields only so high because share prices are so low. And that means you could be sinking your investment in a dividend stock that, at the end of the day, isn’t going to bring you any returns.
That’s why today, we’re going to look at two dividend stocks to consider — one that might be worth waiting on, and one that could be a buy today.
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EIT.UN
First up, we have Canoe EIT Income Fund (TSX:EIT.UN). This dividend stock is for sure on the riskier side, with a high yield that has historically been around 10%. Distributions in a fund like Canoe tend to come from a mix of income, capital gains, and sometimes return on capital (ROC). This can erode net asset value (NAV) over time if not fully covered.
And with Canoe, there are some red flags to consider. For instance, revenue over earnings was down about 30% year over year. Therefore, if income is falling even as distributions continue, the company is putting itself at risk of future cuts.
Furthermore, debt to equity (D/E) is near 10 times with a current ratio of 0.18; therefore, EIT is heavily leveraged for an income fund. Leverage can boost returns in good markets but also has a downside in selloffs. This makes it less of a “buy-and-hold-forever” stock. Finally, shares are closing near 52-week highs, so there really isn’t any value you’re getting from the dividend stock right now. Now, let’s look at a stock that offers value and more.
POW
If you want a dividend stock that checks all the boxes, Power Corporation of Canada (TSX:POW) is a strong option. This dividend stock continues to demonstrate steady growth, all backed by its core business. During its recent quarter, revenue was up 5.4%, with earnings up 5.7% year over year. This shows the dividend stock is providing consistent growth.
Furthermore, POW generates recurring earnings. This comes from financial subsidiaries, with stability better suited to compounding when you’re putting it inside a Tax-Free Savings Account (TFSA). Meanwhile, its debt remains stable, with a D/E of just 49%. Therefore, POW carries leverage, but at quite manageable levels for a financial holding company. This helps put its beta at just one, sensitive to the market, but stable.
Then there’s the dividend. Sure, POW has a lower yield, but it’s far more sustainable at 4.25% as of writing and a payout ratio of just 55%. Therefore, the dividend stock can raise it in the future without any concerns. Meanwhile, it also offers value, trading at just 10.2 times earnings at writing.
Bottom line
So, yes, EIT has a huge dividend yield that can certainly bring in income, but for how long? If you want to put cash into a TFSA and see it compound year after year without worry, then EIT probably isn’t the option for you. Instead, POW offers up dividends while still providing stability and growth. While not flashy, it offers a healthy balance of value, dividend security, and steady earnings. Altogether, it’s a top dividend stock for long-term growth and income.
