Investors looking for years of reliable income might be making a huge mistake. That’s by potentially going to a list of dividend stocks, sorting by yield, and buying the one with the highest yield out there. The problem? Yields are a percentage of the share price. So, if a stock is dropping, then yeah, that dividend yield is going to get super high! But that can also mean there could be a cut in the future, and what’s worse, you’re investing in a company that’s seeing its share slump further.
Instead, it’s important to find strong companies that merely offer a dividend yield. That’s why today we’re going to look at a dividend stock that might be down 11% but might offer a major opportunity for those who see value and income for years to come.
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Enter EQB
The bank stock investors may want to consider on the TSX today is EQB (TSX:EQB), a digital banking and commercial, mortgage, lending and wealth support company. The bank stock has shown strength over the last few years, with $137 billion in assets under management as of its latest earnings report.
There are a few strengths to consider for EQB as well as advantages. For example, since it’s a branchless company focusing on digital first and cloud banking, there is lower overhead compared to traditional banks. Furthermore, many banks avoid lending to nontraditional or uninsured mortgage segments. However, EQB isn’t one of them, providing them a strong niche. This also gives it some diversification to reduce reliance on any one vertical.
And right now, the bank stock looks quite attractive. While modest, it has a 2.4% dividend yield with an ultra-low payout ratio of 22.7%. Therefore, current earnings can easily cover that dividend. Plus, it has a very conservative price-to-earnings (P/E) ratio, trading at 10.5 times earnings and 8.5 times forward earnings. It also trades at 1.07 times book value, so it’s certainly not expensive.
Considerations
That all being said, there’s a reason shares have dropped. Operating cash flow during its third-quarter results came in materially negative, down $2.63 billion in the last year. This is a huge red flag for dividend reliability unless there’s some benign explanation. Total debt is also high at $14.21 billion relative to a $3.55 billion market cap at writing. Furthermore, revenue dropped 11% year over year, with quarterly earnings down 34.7%.
This means there’s some near-term performance weakness that investors need to watch. Sure, these numbers are certainly consistent with a financial institution with sizeable customer deposits or financing liabilities. Therefore, cash flow lines and balance sheets from banks like this are interpreted differently, making EQB look far more normal.
In that case, if you’re interested in getting in on this bank stock, I would certainly consider dollar-cost averaging (DCA) rather than one lump sum. This way, you’re getting in on a strong share price, but also potentially buying at different levels to manage your risk. Plus, you’ll be receiving income from a dividend while hopefully seeing the share price increase.
Bottom line
EQB bank stock isn’t an investment without risk at these levels. That being said, the dividend yield looks well supported by its payout ratio. However, investors will certainly need to look for further improvements in debt levels and cash flow. So, while shares may be down in the last year now, they’ve already climbed up about 3% since earnings. Therefore, now could be a great time to get in on higher dividend income at a great price.
