Can a mortgage lender sustain a 10.5% dividend yield while maintaining a loan portfolio that earns 7.7% weighted average interest? The dividend yield is influenced by share price fluctuation and the loan interest rate by the Bank of Canada’s policy rate decisions. Dividend payments depend on the number of shares and interest earned on the loan amount.
When there is no direct correlation between interest earned by a lender and its dividend yield, why compare them? Because short-term mortgage lender Timbercreek Financial (TSX:TF) is showing warning signs of a dividend trap.
A person stands in front of several doors representing different U.S. stock options for Canadian investors.
The attractiveness of a 10.5% yield
A 10.5% yield is way too attractive to be true. This yield, if sustained, can double your money in less than seven years. A $50,000 investment would earn you $5,250 in annual dividends. But the question is, can this too-good-to-be-true yield be sustained?
Timbercreek Financial issues short-term mortgages to commercial REITs for income-producing assets. REITs use this loan to buy, develop, or enhance the property to earn rent. They repay the mortgage from the rental income or from the bigger loan from banks.
Timbercreek Financial’s share price determines the value of its loan portfolio, which stood at $1.2 billion at the end of the first quarter of 2026. The lender has taken $1.4 billion of debt and earns income from the loan processing fees and the difference in interest paid and received.
Timbercreek’s share price has dipped 9% since February 2026 to $6.60, lower than its book value per share of $7.96. Don’t mistake it for a discount. The share price is trading below the book value because the lender reported a $3.7 million expected credit loss (ECL) on its loan portfolio. This shows the market has discounted the share price for its high credit risk.
Signs that a 10.5% yield could be a dividend trap
Timbercreek Financial’s share price fell steeply in February because its dividend was 98.5% of the distributable income. Now, the understanding with dividends is that a company shares its surplus profit with shareholders. But here the company calculates distributable income after deducting ECL, amortization, accretion, unrealized fair value adjustments, and unrealized gain or loss from total net income. In an unforeseen event, if the lender sees a debtor default on a major loan, it doesn’t have the flexibility to take the hit and still pay dividends.
Timbercreek’s dividend per share is 137% of earnings per share, which takes into account all the non-cash adjustments related to credit risk.
Chances of distributable income falling are reduced as 88.4% of the lender’s loan portfolio has hit the floor rate, and 9% of the loans have a fixed interest. This means the weighted average interest rate of its loan portfolio is unlikely to fall significantly from 7.7% at present.
It has increased its credit utilization rate to 93.6% from 82.9% in the first quarter of 2025. However, falling interest rates have reduced its net income. Timbercreek has to increase new loans and grow its loan portfolio as the interest rate stabilizes. A stronger loan portfolio could ease investors’ concerns around a dividend cut.
A higher-yielding stock with safer dividends
While Timbercreek has not slashed its dividend, the 98.5% payout ratio is alarming. A safer dividend option is SmartCentres REIT (TSX:SRU.UN), offering a 6% yield and a payout ratio of 86.4% of adjusted funds from operations. The REIT rental income is less volatile and keeps growing as most of the stores are occupied by Walmart and Walmart-anchored stores.
The rental income could fluctuate if the occupancy ratio falls drastically. But the sticky nature of Walmart stores makes the rent safe and dividend payments from them safer. SmartCentres has a potential upside as 14% of its properties are under development. When they start generating rental income, distributable income will increase.
Investor tip
Investors who take risks sometimes benefit from higher returns and sometimes take the hit. The trick is to contain the risk by diversifying into safer stocks and balancing risk. It’s not about taking blind risk, but taking calculated risks.
