At the end of July, the TSX witnessed a major dividend cut from Telus, reiterating the lesson that high yield comes with high risk. Just as Telus offered an 11% yield before the dividend cut, here is another stock walking the tightrope. Short-term mortgage lender Timbercreek Financial’s (TSX: TF) share price has fallen 23% since February 2026 after its first-quarter earnings showed early warning signs. This dip has inflated dividend yields to a dangerous level of 12%.
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This 12% yield looks like a trap
Do not get lured by the 12% yield, as the mortgage lender’s fundamentals don’t support dividend payments. Let’s follow the money trail to understand the thin line between sustaining a dividend and cutting it.
Timbercreek borrows money using lines of credit and lends it to REITs at a higher interest rate for the short term. It earns from the interest gap and loan processing fees. This model works better when loan turnover is high, which brings more processing fees, or when interest rates rise. The years 2022 and 2023 saw accelerated interest rate hikes, and Timbercreek rewarded its unitholders with a special dividend.
However, the fundamentals are tight right now. Timbercreek has a loan portfolio of $1.1 billion, earning a weighted average interest rate of 7.6% in the second quarter of 2026, slightly lower than 7.7% in the first quarter. The stock is trading at $5.68, a 39% discount from its book value per share, as it has increased its expected credit loss (ECL) provision to $6.7 million from $3.7 million in the first quarter.
The high credit risk comes from borrowers delaying loan repayments. Timbercreek handles this risk by shifting them to Stage 2 and Stage 3 recovery loans. This increases the risk of dividend cuts, as Timbercreek pays dividends from the net interest income.
The trap
At first glance, you will see a payout ratio of 97.7% of distributable income, but that is a trap. Investors should note how Timbercreek Financial calculates distributable income. It excludes all non-cash adjustments used to calculate credit risk, such as ECL, amortization, accretion, unrealized fair value adjustments, and unrealized gain or loss from total net income. The payout ratio as a percentage of earnings per share is 182.8%. If any borrower defaults, a dividend cut is imminent because the payout ratio excluding credit risk is 97.7%, giving little financial flexibility to Timbercreek.
Here’s the safer alternative
If you are buying or holding Timbercreek Financial for its monthly payouts, a safer high-yield alternative is SmartCentres REIT (TSX: SRU.UN). With an annual dividend yield of 6.7%, it is one of the highest yields with strong fundamentals that can sustain dividends. Even SmartCentres’ high yield comes with high risk, but it is relatively safer than Timbercreek. SmartCentres reported a payout ratio of 86.7% of adjusted funds from operations (AFFO) in the second quarter of 2026, which deducts straight-line rent, actual capital expenditures, and leasing costs.
The REIT not only rents retail stores but also sells residential spaces, and AFFO with adjustments includes the loss or gain from such sales. The dividend payout ratio for AFFO with adjustments is 94.9%, which shows that the REIT can sustain dividends even after incurring non-recurring expenses and losses.
SmartCentres REIT has a safety net in being Walmart’s landlord since 1999. The REIT expanded its retail presence through Walmart-anchored stores. Now it is expanding its radius around Walmart stores by building mixed-use facilities, like residential, offices, and storage spaces. SmartCentres’ payout ratio will improve as more projects under development come online and start paying for themselves.
