At present, several dividend stocks on the TSX are trading near their lows and offering a tempting 10% yield. Your brain automatically starts calculating the dividend it can fetch you in a year. Before you make a huge mistake and invest a large sum or your entire Tax-Free Savings Account (TFSA) amount on that 10% yield, read their financial statements. Because a high yield comes with a high risk of dividend cut or dividend pause.
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A 10% yield that could be a dividend trap
Timbercreek Financial (TSX:TF) is a dividend stock that witnessed a sharp 9.6% dip in the week it released its fourth-quarter 2025 earnings. This dip increased its dividend yield to 10.2%. The earnings dimmed investors’ confidence in the safety of Timbercreek’s dividends.
Timbercreek offers short-term mortgages to REITs for developing or acquiring income-generating properties. Its total mortgage portfolio is $1.2 billion as of December 31, 2025, an increase from $1.5 billion a year ago. The mortgage portfolio has increased, and its expected credit loss was marginally up. Timbercreek earns money from net interest income and lender fees.
The Bank of Canada’s interest rate cuts reduced Timbercreek’s weighted average interest rate to 8.1% in the fourth quarter of 2025 from 8.9% a year ago. As of December 31, 2025, more than 86% of its net mortgage portfolio has reached its floor rate. The mortgage has a minimum interest rate beyond which the interest will not reduce, even if the Bank of Canada cuts interest rates. The net interest income remained almost flat as a dip in interest rates was offset by a bigger mortgage portfolio.
Timbercreek has been resolving Stage 3 loans by selling secured assets at a loss. It even reported a loss on fair value through profit and loss (FVTPL). While it has shown improvements in loan volumes, the increase in Stage 3 loans and reduction in FVTPL impacted its net income and funds from operations (FFO). Thus, its dividend payout ratio increased to 96.7% in 2025 from 88.3% in 2024.
Three reasons to avoid Timbercreek Financial’s 10% yield
Credit risk: Although mortgage activity has improved, the credit risk is high. Many commercial activities are moving slowly amid uncertainty from the US-Canada trade tensions.
Bottomed Out: It is difficult to say if Timbercreek has bottomed out or not. With 86% of the mortgage portfolio reaching a floor, the dip in interest income could slow. However, if the worst is not yet over, it remains to be seen if it can withstand a slowdown in lending or a bigger Stage 3 loan.
The risk-reward ratio: If 10% yield is considered as the risk premium, the reward is not attractive enough.
Until the payout ratio starts decreasing and the lender shows improvement in FFO, Timbercreek could be a dividend trap, as dividends will feel the first hit of declining cash flows.
Investor takeaway
A better risk-to-reward ratio is of SmartCentres REIT, as it has started reducing its dividend payout ratio from 91.7% in 2024 to 89.2% in 2025. The REIT is offering a 6.7% annual yield. In the worst-case scenario, Timbercreek slashes dividends by 50%, in which case, the yield will fall to 5%.
