A High Yield Won’t Save You From a Dividend Cut: This 2.5% Payout Looks Safer

A huge dividend yield can be a trap if it’s high because the stock price is falling and a cut is coming.

Amy Legate-Wolfe

Author Bio Amy became interested in investing in 2018 after having her first daughter. After receiving a masters degree in journalism from Western University, she became frustrated that the finance industry remained a confusing place for Canadians like her: new parents, millennials, and other young people who needed to understand their finances. Now, Amy focuses on tech companies and renewable energy for growth opportunities, coupling that with long-term investing strategies and equities. She also provides investors with a daily newsletter, Canada Stock Digest, for daily market updates. Her work can also be found at Canada's National Observer, where she writes on the business side of climate action. Before joining Motley Fool Canada, Amy wrote for major news organizations including HuffPost, CTVNews.ca, and CBC. When she’s not researching investing strategies, Amy’s time is pretty much monopolized by her two wild daughters, but in what little spare time she has she loves to do yoga, go on walks with her dog, and travel with her husband. Social Media Follow Amy on LinkedIn and Canada Stock Digest. Favorite Investment Quote “October: This is one of the particularly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” – Mark Twain

Published September 3, 10:30 am EDT

A giant dividend yield can look like a shortcut to passive income. Sometimes, it’s closer to a warning light.

Yield rises when a dividend increases, certainly. It also rises when a stock price collapses. That means the tempting 8% or 10% yield appearing on your screen may simply be investors betting the existing dividend won’t survive. If they’re right, shareholders can get the unpleasant two-for-one special: less income and a falling share price.

That’s why I’d rather own a 2.5% yield that can grow than an 8% yield being held together with crossed fingers.

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How to start

Dividend investors should start with payout coverage. A company earning $2 per share and paying $1 has considerably more breathing room than one earning $1 while paying $1.20. Cash flow matters, too, because dividends ultimately require actual cash rather than accounting enthusiasm.

Growth comes next. A lower yield that rises 5% or 6% annually can become far more valuable over a decade, particularly when those dividends are reinvested into additional shares. Payment frequency is mostly a convenience. Monthly sounds lovely, but a well-covered quarterly dividend beats an unsustainable monthly one every time.

That combination brings me to a TSX stock that doesn’t receive nearly as much attention as the usual pipeline giants.

ALA

AltaGas (TSX: ALA) owns two main businesses. Its regulated utilities distribute natural gas to roughly 1.6 million customers in the United States, while its midstream operations process and export Canadian natural gas liquids, particularly propane and butane, to Asian markets.

That creates an appealing split. Utilities can provide relatively predictable regulated earnings, while the export business offers more growth as Canada sends greater volumes of energy to overseas customers. For investors looking through Canadian dividend stocks, the payout is particularly interesting.

AltaGas stock pays $0.334 quarterly, or about $1.34 annually. At a recent share price around $53, that produces a yield of approximately 2.5%. Hardly enough to make an income investor spill their coffee. Yet the coverage looks much more interesting than the headline yield.

AltaGas stock targets an earnings payout ratio of 50% to 60%. Its newly increased 2026 normalized earnings-per-share (EPS) guidance sits between $2.35 and $2.60. Against a $1.34 annual dividend, the payout would equal roughly 54% of the midpoint. There’s room for the business to invest, absorb some disappointment, and still pay shareholders.

Upping the dividend

AltaGas stock has also increased its dividend for six consecutive years and expects annual dividend growth of roughly 5% to 7% through 2030. That steady climb is more useful to me than starting with an enormous yield and hoping nothing goes wrong. Investors who reinvest those payments inside a TFSA can also compound the income without Canadian tax on the investment gains or withdrawals.

There’s a current growth story behind it as well. Second-quarter normalized earnings before interest, taxes, depreciation, and amortization (EBITDA) increased to $391 million from $342 million a year earlier. AltaGas stock subsequently raised its full-year normalized EBITDA guidance to between $2 billion and $2.1 billion and increased normalized EPS guidance by 6%.

Its global export business helped drive that performance. AltaGas stock shipped a record 144,420 barrels per day of liquefied petroleum gases to Asia during the quarter, up 13% year over year.

What to watch

AltaGas stock isn’t cheap after a strong run. Around $53, shares trade at roughly 21 times the midpoint of 2026 normalized EPS guidance. Its REEF export project has also encountered maritime construction delays and a roughly 12% increase in estimated costs to $1.5 billion. Commercial operations are now expected before the end of the first quarter of 2027.

Debt deserves watching as well, even though adjusted leverage improved to 4.4 times normalized EBITDA in the latest quarter. Those risks are why I wouldn’t call the dividend guaranteed. Still, income investing shouldn’t be a contest to find the largest percentage on a stock screener. AltaGas stock offers a more modest 2.5% today, backed by improving earnings, a roughly 54% implied payout ratio, and plans for continued dividend growth.