A 10.5% Yield That Looks Attractive – Here’s Why It Could Be A Dividend Trap

Is a 10.5% dividend yield too good to be true? Discover key insights on mortgage lender Timbercreek Financial’s situation.

| More on:
Key Points
  • Potential Risk in Timbercreek's High Yield: Timbercreek Financial's 10.45% dividend yield may be unsustainable due to credit risks and a high payout ratio, signaling a potential dividend trap, as its share price decline suggests elevated credit concerns and limited flexibility to absorb losses without impacting dividends.
  • Safer Dividend Alternative with Growth Potential: SmartCentres REIT offers a more stable 6% yield, supported by reliable rental income from Walmart-anchored properties, a reduced payout ratio, and potential upside from property development, presenting a safer investment for those looking to balance risk and returns.

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.

Canadian investor contemplating U.S. stocks with multiple doors to choose from.

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.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends SmartCentres Real Estate Investment Trust and Walmart. The Motley Fool has a disclosure policy.

More on Dividend Stocks

House models and one with REIT real estate investment trust.
Dividend Stocks

Your GIC Is Maturing: Here’s Where I’d Put $10,000 for More Income

When GIC rates fall, a grocery-anchored REIT like Crombie can offer higher monthly income with some growth potential.

Read more »

top TSX stocks to buy
Dividend Stocks

1 Canadian Dividend-Growth Stock Built to Deliver in Any Market Condition

Alimentation Couche-Tard (TSX:ATD) stock looks like a dividend-growth play that can do well in most climates.

Read more »

investor looks at volatility chart
Dividend Stocks

A Top TSX Dividend Stock to Buy on Pullbacks

This high-yield stock offers good prospects for dividend growth.

Read more »

A solar cell panel generates power in a country mountain landscape.
Dividend Stocks

1 Canadian Dividend Stock Down 19% to Buy and Hold Forever

This Canadian dividend stock is down about 19% from its 52-week high, but its record FFO, a 5.1% dividend yield,…

Read more »

A woman stands on an apartment balcony in a city
Dividend Stocks

Why I’m Bullish on This TFSA Dividend Stock Yielding 2.7% Monthly

Boardwalk REIT’s monthly distributions, resilient operating growth, and discounted valuation could make it an attractive TFSA stock to buy now.

Read more »

you're never too young or old to start investing in stocks
Dividend Stocks

3 Best Dividend Stocks in Canada for Beginner Investors

A look at three of the best dividend stocks in Canada for beginner investors, including their yields and why they…

Read more »

Concept of rent, search, purchase real estate, REIT
Dividend Stocks

Why I’m Watching This 4.6% Dividend Stock That Pays Monthly Cash

Sienna Senior Living offers investors a 4.6% dividend yield with monthly payouts, while its recent share price pullback makes the…

Read more »

Canadian investor contemplating U.S. stocks with multiple doors to choose from.
Dividend Stocks

Enbridge vs. Telus: Which Is the Better Dividend Stock to Own Through 2026?

Enbridge and Telus both offer attractive yields, but their financials and underlying fundamentals reveal a big difference in dividend stability…

Read more »