Income Investors: Can You Count on IGM Financial Inc. and its 6.1% Yield?

IGM Financial Inc. (TSX:IGM) has one of the best dividends out there. Can investors count on it to pay for the next decade?

| More on:
The Motley Fool

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Today’s low interest rate environment is tough on folks who need to generate consistent income from their investments.

The days of GICs and other zero-risk investments yielding 5% are over. So, investors are left with a few choices. They can either invest in dividend-growth names that provide a smaller current yield but have growth potential, or they can invest in stocks with higher yields and limited growth.

Many of these higher-yielding stocks pay out a large percentage of their earnings in dividends. This makes the yield that much more risky. If a company that pays out 80% of earnings as dividends stumbles a bit, a dividend cut could be very likely.

But there are higher dividends that are safe. One that’s popular with investors is IGM Financial Inc. (TSX:IGM). Can income investors count on the wealth manager to maintain its generous 6.1% dividend?

The business

IGM Financial isn’t your typical wealth manager.

It’s the owner of Investors Group, one of Canada’s leaders in the sector. Nearly 5,000 Investors Group financial advisors provide millions of customers with mutual funds, life insurance, and mortgages. The company has approximately $75 billion under management.

The company also owns Mackenzie Financial, one of Canada’s largest mutual fund families. Mackenzie funds are primarily sold by Investors Group advisors, but they’re also marketed by some 25,000 other fund salespeople.

The big advantage it has compared with a company like AGF Management Limited is the in-house sales staff. It has Investors Group agents that are instructed to push company funds. AGF and other competitors are stuck trying to convince advisors working with other companies to push their funds.

Having its own fleet of advisors helps IGM in another way, too. It can offer things like ultra-low mortgage rates as a loss-leader to help entice customers. If somebody shows up for a mortgage, an Investors Group agent has the opportunity to sell them on other wealth management products. It’s hard to cross-sell as a competitor when all you offer is funds.

The issues

This has traditionally been a good business. Mutual fund fees of 2.5% and up ensured the company some handsome profits.

But these days, IGM is having to deal with some serious headwinds. The first issue is the popularity of exchange-traded funds. Investors are starting to figure out just how much fees drag total returns. If someone buys a mutual fund that returns 8% annually, that falls to just 5.5% after paying a 2.5% management fee. That’s more than 30% of total returns.

The other big issue that’s upcoming is new rules coming out in 2016 that require advisors to disclose any management fees in dollars, rather than in percentage points. This means that on a portfolio worth $100,000, a 2.5% management fee suddenly turns into $2,500 worth of fees. Once they’re presented with actual dollar figures, many customers might start to look for cheaper options.

Will this affect the dividend?

Investors have already figured this change will affect earnings going forward. Shares of the company have fallen more than 15% over the last year, as investors are nervous about the future of the business. I was one of them; I sold my shares back at the $45 level in late 2014.

At first glance, the dividend sure looks sustainable. Earnings over the last 12 months came in at $3.05 per share, while the company paid out $2.25 per share in dividends. That’s a payout ratio of 73%, which isn’t bad for a stock yielding more than 6%.

The issue is what earnings will end up doing in the future. Shares trade at just 12.2 times earnings, which is a significant discount to the market as a whole. But compared with many of its competitors–like Canada’s banks–that’s actually a bit expensive.

The other issue is the balance sheet. The company has increased debt by nearly 60% since the end of 2011, as total borrowing has gone from $5.1 billion to $8.1 billion today. More debt isn’t necessarily bad, but earnings have stayed flat during the time. I’m not sure the money was borrowed wisely.

At this point, IGM’s big dividend looks to be secure. However, investors need to keep an eye on results and make sure earnings don’t take a hit next year with the new rules.

Should you invest $1,000 in Canadian National Railway right now?

Before you buy stock in Canadian National Railway, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Canadian National Railway wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $20,697.16!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 29 percentage points since 2013*.

See the Top Stocks * Returns as of 3/20/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Dividend Stocks

Dividend Stocks

3 Canadian REIT Stocks to Buy and Hold for the Next Quarter-Century

These three Canadian REITs trade cheaply and are highly reliable, making them some of the best stocks you can buy…

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Practically Perfect Canadian Stock Down 24% to Buy Now and Hold for Life!

CNR stock is a top Canadian stock for investors, especially with shares down on the TSX today.

Read more »

Canada national flag waving in wind on clear day
Dividend Stocks

The Best Canadian Stocks to Buy Right Away With $30,000

If you have $30,000 you're willing to invest, these are some of the first Canadian stocks to consider on your…

Read more »

rail train
Dividend Stocks

What to Know About Canadian Pacific Railway Stock for 2025

CP stock has now gone through a major merger, so what do investors have to look forward to?

Read more »

ways to boost income
Dividend Stocks

Top Canadian Value Stocks I’d Buy for Dividend Growth and Appreciation

If you are looking for income and capital appreciation, here are three Canadian value stocks for a great total return…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Canadian Stock to Buy With $2,000 Right Now

The company’s powerful combination of growth, income, and value, positions it well to deliver solid returns, making it a smart…

Read more »

Transparent umbrella under heavy rain against water drops splash background. Rainy weather concept.
Dividend Stocks

This 10.6 Percent Dividend Stock Pays Cash Every Single Month

Are you looking to invest for a rainy day? This 10.6% dividend stock pays cash every month, irrespective of the…

Read more »

A worker gives a business presentation.
Dividend Stocks

Market Dip: Opportunity or Risk This April?

This market dip might have investors worried, but should they be excited instead?

Read more »