When investors are looking for Canadian dividend stocks to buy, it’s easy to get pulled in by the highest yields.
And that’s not always a bad thing. In fact, building a portfolio takes a mix of different types of stocks, and plenty of investors prefer to pair some higher-yield names alongside growth-focused investments.
However, even when you’re buying a stock primarily for the income it generates, the most important thing to understand is whether that payout is actually sustainable.
Because if you’re building a long-term income portfolio, the goal isn’t just to find the biggest yield. It’s to understand where that income is coming from, whether the business can continue generating it, and how each holding fits into a balanced portfolio over time.
So with that in mind, here are two Canadian dividend stocks that both yield roughly 6.2% today, but more importantly, have business models designed to support those payouts over the long haul.
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A high-yield Canadian dividend stock with an ultra-conservative payout ratio
If you’re looking for a high-yield Canadian dividend stock to buy that can significantly boost the yield your portfolio generates, Alaris Equity Partners (TSX:AD.UN) is easily a top choice.
Alaris is ideal because, instead of operating a traditional business, it provides capital to private companies in exchange for ongoing distributions. So, it acts more like a partner to a portfolio of businesses, collecting cash flow from each of them over time.
That’s why it’s such a popular dividend stock among Canadians. It has a diversified group of partner companies contributing to its overall cash flow, which helps reduce risk and smooth out performance over time.
Furthermore, while Alaris stock currently yields roughly 6.2%, it currently has a trailing 12-month payout ratio of just 58%. That means not only is there a significant margin of safety, but Alaris is retaining a tonne of cash which it can eventually use to expand its portfolio, generating more income for investors.
A royalty stock with a simple business model
In addition to Alaris, another high-yield stock with a similar asset-light, high-margin cash flow business model is Freehold Royalties (TSX:FRU).
Freehold is an energy stock that owns royalty interests on a large portfolio of land. So, other companies operate the wells, and Freehold simply collects a percentage of the revenue from production on its land.
That means not only does Freehold have less risk because it doesn’t take on the same operational responsibilities as traditional energy producers, but it also means that the Canadian dividend stock has a much lower cost structure.
Furthermore, it doesn’t need to spend on drilling or maintaining production, which allows a tonne of its cash flow to be returned to shareholders.
In fact, that’s why Freehold can yield roughly 6.2% today, while keeping its payout ratio safe and sustainable at 75% of its funds from operations.
And like Alaris, not only does its conservative payout ratio significantly reduce the risk of dividend cuts for investors, it allows Freehold to build a cash position over time, which it has historically used to help acquire new land and expand its royalty interests.
So, if you’re looking for a high-yield Canadian stock to buy now and hold for years, Freehold is a top pick in the energy space, especially for passive income seekers.
