High dividends are a sign of risk, which makes one wonder if the stock is worth the risk. Dividend yield is the annual dividend per share as a percentage of the share price. If a stock of $100 pays a $10 annual dividend, its yield is 10%. Often, the yield increases because the stock price falls, and the stock price falls because of macro or company headwinds.
Thus, when investing in a high-yield stock, one should see if the company can sustain its free cash flow and whether it has to cut dividends. Let us deep-dive into Timbercreek Financials’ (TSX:TF) 9.5% dividend yield and measure the risks and rewards.
Timbercreek Financial’s ultra-high dividend yield
Timbercreek Financial provides shorter-duration mortgage loans to income-producing properties in urban areas. Since it is non-banking, loan approvals are faster, terms are flexible, and interest rates are higher as credit risk is also higher.
Timbercreek mitigates this credit risk by giving loans to income-producing REITs with regular cash flows for properties in key urban areas with high liquidity.
Most REITs use Timbercreek’s loans as bridge financing for property acquisitions, redevelopment, and capital improvements. They repay loans through conventional financing once projects are completed or properties are sold. This time gap carries credit risk as it could take longer to secure financing or to sell properties.
The Bank of Canada’s interest rate cuts reduced loan yield but revived lending activity. In the second quarter of 2025, Timbercreek increased its net mortgage investments to $1.03 billion from $960.3 million a year ago. It earned an 8.6% weighted average interest rate on its investment, down from 9.8% a year ago. It has used 87.4% of its available credit limit and has room to lend more money.
Timbercreek’s dividend yield is 9.5% because the stock is trading 25% below its February 2022 high of $9.65 and 11.7% below its book value per share of $8.26. The market has priced in Stage 2 and 3 loans that have increased its expected credit loss (ECL) to $2.1 million from $97,000 a year ago.
The risk that comes with Timbercreek’s 9.5% dividend yield
The market has priced in the credit risk of Stage 2 and 3 loans and a slow recovery in lending activity. About 80.3% of Timbercreek’s loan book has reached its floor rate, which has reduced the impact of future rate cuts.
The worst seems to be over for Timbercreek as it can now secure financing at a lower interest rate. The next step is an uptick in lending demand, which has been lagging due to trade war uncertainty.
So far, Timbercreek has held on to its dividends by distributing 97.8% of its distributable income. However, its payout ratio is 115.4% of its earnings per share, which considers ECL. If high-risk borrowers default, the lender might have to cut dividends or pay dividends from its reserves.
The high yield of 9.5% is a premium for the risk that comes with a 115.4% payout ratio from earnings per share.
Is Timbercreek Financial worth the risk?
Interest rate cuts have reduced the cost of funds but also the interest income. The tariff uncertainty led to weak macroeconomic conditions that slowed recovery in real estate lending activity. US President Donald Trump has terminated trade negotiation talks with Canada, but that doesn’t seem to affect the Canadian economy because of an upcoming Supreme Court case on the legality of Trump tariffs.
In the best-case scenario, macro conditions will revive and boost lending activity. That could drive Timbercreek Financial’s share price up 5–7% and help it sustain the current dividend per share. In the worst-case scenario, stage 2 and 3 loans may default, and it will recover the money by selling the property. That could lead to dividend cuts and reduce its share price by 10% or more.
Timbercreek is seeing a recovery of its Stage 2 and 3 loans, and a gradual increase in lending. The fact that the lender has sustained the 2020 pandemic without a dividend cut makes the stock worth the risk. A $2,000 investment in Timbercreek Financial can earn you $189 in annual dividends.
