A 12% Yield Sounds Too Good: This is One to Avoid

A 12% yield can be a warning sign, not an opportunity. Here’s why Timbercreek Financial’s payout looks far riskier than it first appears

Adam Othman

Adam is a value investor who is always on the hunt for fantastic undervalued companies that he can share with Motley Fool readers. He follows Warren Buffett and Charlie Munger's investment advice and has completed the Canadian Securities Course. When he's not investing, Adam can usually be found traveling or skiing.

Published September 16, 4:20 pm EDT

Not every double-digit yield is a gift. Sometimes the market is quietly telling you that something has already gone wrong.

That is the uncomfortable position Timbercreek Financial (TSX: TF) finds itself in today. Units of the short-term mortgage lender have slid roughly 23% since February 2026, and at $5.55 apiece, the monthly distribution now offers a yield of about 12.4%. A number like that tends to stop income investors in their tracks.

A modern office building detail — Source: Getty Images

Timbercreek Financial

Timbercreek is not a bank stock, and it does not own buildings. It borrows through lines of credit and relends that capital to commercial real estate owners on a short-term basis, collecting the spread between the two rates. It also earns fees each time a loan is originated or renewed.

The portfolio itself is built around stability. At the end of the second quarter of 2026, roughly 81% of Timbercreek’s investments were secured by cash-flowing properties, with multi-residential assets making up about 60% of the book. First mortgages represented approximately 94% of total investments, and 97% of invested capital was concentrated in Ontario, British Columbia, Quebec, and Alberta.

That asset mix sounds defensive on paper, since apartment buildings tend to hold their value better than office towers or retail centres when commercial real estate wobbles. But the quality of the collateral only matters if borrowers can keep paying.

The model works best when money is moving. Rising rates in 2022 and 2023 widened those spreads, and the company rewarded investors with a special distribution, but today, the picture looks very different. Timbercreek’s loan book sits at roughly $1.1 billion, earning a weighted average interest rate of 7.6% in the second quarter of 2026, down slightly from 7.7% in the first quarter.

Follow the money

Timbercreek reported distributable income of $14.6 million in Q2 2026, which works out to $0.18 per share. Against the $0.058 monthly payment, that is a payout ratio of a whopping 97.7%. Almost every dollar coming in goes straight back out the door.

But even that figure flatters the situation. Timbercreek strips out non-cash items such as expected credit losses, amortization, accretion, fair value adjustments before arriving at distributable income. Measure the distribution against actual earnings per share of $0.37 instead, and the payout ratio balloons to 182.8%. This means that company is handing investors nearly twice what it earns.

But the problem here is that this leaves essentially no cushion. A single borrower failing to pay would be enough to force management’s hand. And the strain is already visible in the loan book. Timbercreek raised its expected credit loss provision to $6.7 million in the second quarter, nearly double the $3.7 million recorded in Q1. Borrowers are delaying repayments, and the lender has been reclassifying those loans into Stage 2 and Stage 3 recovery buckets.

Where income investors can look instead

There is a difference between a high yield and a safe one. SmartCentres REIT (TSX: SRU.UN) expresses this quite well. The REIT distributes $0.15 per unit monthly, which works out to $1.85 annually and a yield near 6.9% at current levels, roughly half of Timbercreek’s.

In exchange, investors get a far sturdier foundation. SmartCentres owns approximately 200 properties anchored heavily by Walmart, and more than half of its locations count the retailer as a primary tenant. Grocery and everyday essentials keep traffic steady even when households tighten their belts. Occupancy closed the second quarter of 2026 at 98.1%, and rent growth on non-anchor lease extensions reached 12%.

Foolish takeaway

A 12.4% yield is not automatically an opportunity. Sometimes it is compensation for risk you would rather not take.

Timbercreek Financial pays out nearly all of its distributable income and considerably more than it earns. With credit provisions rising and the loan portfolio showing stress, the distribution looks far more fragile than the headline number suggests.

SmartCentres REIT hands investors a smaller cheque, but one backed by near-full occupancy, essential-goods tenants, and a payout the business can comfortably support. For anyone building a passive-income stream, that trade-off is worth making. Timbercreek is one high-yield stock I would stay away from.