Can I have some more yield, please?

Why smart dividend investors skip stocks with extremely high yields

  1 Premium content image

by

Online only.

  1 Premium content image

Income investors looking for satisfactory yields from bonds are feeling like the rich relatives of Oliver Twist these days. They just want a little more, please. They can get it–and use some of the extra income to help the poor–if they turn to the admittedly riskier world of dividend stocks.

There are over 300 dividend stocks on the TSX that range from tiny energy firms to giant banks. If you sort all of them by yield, half pay their shareholders more than 3.78% and half pay less.

To get a better sense of the dividend market, I split the list of dividend stocks into 10 equal parts (called deciles). The yields that separate the groups from one and other are shown in the accompanying table and they’re called breakpoints.

Canadian Dividend Yield Breakpoints
Low 2 3 4 Middle 6 7 8 High
1.14% 1.71% 2.37% 3.08% 3.78% 4.56% 5.47% 6.68% 8.47%
Data Source: Bloomberg, Sept. 24, 2015

A single breakpoint is needed to slice a list into two groups, two are needed to cut it into three equal parts, and so on. Nine breakpoints are used to separate the list of dividend payers into 10 groups containing an equal number of stocks.

Stocks with dividend yields of 8.47%, or more, make it into the top decile. At the other end of the spectrum, those that pay less than 1.14% are in the bottom decile.

Before you rush out to buy the highest yielding stocks, you should be aware that an extremely high yield is often a sign that the market thinks a dividend cut (or worse) is in the offing.

For instance, Toscana Energy (TEI) has a yield of 22% based on its indicated dividend rate and closing price on Sept. 24. Problem is, the tiny firm isn’t profitable, its stock is down by more than 50% over the last 12 months, and it has already cut its dividend once this year. Another cut is a real possibility.

Conservative investors wisely focus on firms in the 5th to 7th yield deciles (with 1 being low and 10 being high). That is, stocks that yield between about 3.1% and 5.5% these days.

You’ll notice that most of this week’s Safer Canadian Dogs provide yields between 4% and 5%, which is comfortably just above the middle point of the distribution.

Potash Corp (POT) is the exception with a yield of 7.2%. On the plus side, the company earns a little more than it pays out in dividends and analysts expect it to continue to do so over the next few years. On the other hand, it’s fortunes rest on commodity prices which are difficult to predict with certainty. It will be interesting to see how it fares.

Safer Canadian Dogs

Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.

The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.

My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as having positive earnings. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.

Here’s the updated Safer Dogs of the TSX, representing the top yielders as of Sept. 24. The list is a good starting point for those who want to put some money to work this week. Just keep in mind, the idea is to hold the stocks for at least a year after purchase–barring some calamity.


Name Price P/B P/E Earnings Yield Dividend Yield
Potash (POT) $28.04 2.06 13.08 7.64% 7.21%
National Bank (NA) $41.86 1.52 9.26 10.80% 4.97%
Bank of Nova Scotia (BNS) $57.24 1.42 10.7 9.35% 4.89%
CIBC (CM) $92.66 1.85 10.36 9.65% 4.83%
BCE (BCE) $53.86 3.79 18.32 5.46% 4.83%
TransCanada (TRP) $43.67 1.85 17.9 5.59% 4.76%
Bank of Montreal (BMO) $69.79 1.26 11.01 9.08% 4.70%
Shaw (SJR.B) $25.61 2.47 15.81 6.33% 4.63%
Power (POW) $27.25 1.04 7.45 13.43% 4.57%
Royal Bank (RY) $71.43 1.87 10.87 9.20% 4.42%

Notes:
Source: Bloomberg, Sept. 24, 2015

Price: Closing price per share

P/B: Price to Book Value Ratio

P/E: Price to Earnings Ratio

Earnings Yield: Earnings divided by Price, expressed as a percentage

Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage

As always, do your due diligence before buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Remember, stocks can be risky. So, be careful out there. (Norm may own shares of some, or all, of the stocks mentioned here.)

The best way to be smart…

Is to not be stupid
An interview with Microsoft’s Tren Griffin. He talks about Charlie Munger and how to think about thinking.

Success stories

How Elizabeth became a billionaire
Her next 31 years might be even more productive.

One comment on “Can I have some more yield, please?

  1. You can Greatly increases your yields by also selling calls or binary options that are fairly priced with the current market volatility. It can compensate for the potential losses of your holdings. Feel free to check http://binaryoptions-broker.co.uk/ for more information.

    Reply

Leave a comment

Your email address will not be published. Required fields are marked *