When you’re evaluating high-yielding dividend stocks, it’s easy to get distracted by the yield flashing on the screen. But the smartest dividend investors know the story is never just about the number, it’s about how sustainable that payout really is. Here’s what to consider before jumping into any high-yield stock.
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Considerations
Start with payout sustainability. A high dividend might look attractive, but if it’s being funded by debt or one-time profits, it can vanish fast. Check the payout ratio, anything consistently above 80% is a red flag. Investors want dividends backed by reliable, recurring income, not financial gymnastics. Then examine cash flow, not just profits. Dividends are paid in cash, not accounting earnings. A dividend stock might show healthy net income but weak free cash flow once you factor in capital expenses or debt servicing. The best dividend stocks generate ample free cash flow quarter after quarter, even when economic conditions get tough.
Furthermore, look at debt levels and interest coverage. Many high-dividend companies borrow heavily to fund expansion or maintain payouts. When interest rates rise, that debt becomes expensive. Check whether the company can comfortably cover its interest payments from operating income. A low or declining interest coverage ratio suggests the dividend could be at risk if rates stay high.
Industry stability is another big factor. High-yield energy, telecom, and utility stocks often hold up because their services are essential, keeping cash flow predictable. On the other hand, high-yield names in cyclical sectors can see payouts cut when demand falls. Stick to industries where revenue is steady across economic cycles if you’re relying on dividends for long-term income. Plus, these should offer more growth potential, providing future dividend growth as well.
OLY
So now let’s look at two dividend stocks that may not have the highest yield, but do offer the highest payouts. Olympia Financial Group (TSX:OLY) currently sits at $7.20 per share. The financial services company operates mainly through its subsidiary, Olympia Trust Company, offering trust services in multiple provinces. It’s not a large bank, but rather a niche trust & services business. Its size, business model, and growth potential are modest compared to large financial institutions.
At writing, the dividend stock offers monthly dividends of $0.60 per share, coming out at $7.20 annually. The payout ratio sits at a reasonable 75%, which makes the 6.3% yield look quite attractive. The free cash flow margin also sits at 24%, with the operating margin at 29%. These too are quite decent.
There are issues, however. OLY hasn’t had a strong dividend growth background after a significant raise back in 2023. What’s more, the business model is niche and smaller scale. Therefore, it may face more headwinds than large diversified banks. And because it pays so high a percentage of earnings as dividends, there is less reinvestment capability, so slower growth might be baked in. Altogether, it has many of the features you’d want for an income stock, but it’s not risk-free.
FFH
Another option to consider is Fairfax Financial Holdings (TSX:FFH) with an annual dividend of $21.59 at writing. FFH is a diversified insurance and investment company. Through its subsidiaries, it offers property and casualty insurance and reinsurance globally, plus investment management. The investment component means it also has exposure to market and investment-performance risks.
The company offers very strong earnings and book value growth, with a low dividend payout ratio. Therefore, the dividend is very well covered by earnings. Plus, the business is diversified through insurance and investments, so there are multiple income streams. And as it trades at just 8.9 times earnings, it looks fairly valued as well.
The thing is, the dividend yield is quite low at just 0.93%, so you’re getting into this dividend stock more for growth rather than income. What’s more, the growth in dividends has been modest year to year, so you’re not seeing strong dividend growth either. So because the yield is so low, it really depends on what you’re looking for. A financially strong company? Check. A high dividend provider? Not so much.
