Get Big Income With These 3 +7% Yielders

Give yourself a raise with Alaris Royalty Corp. (TSX:AD), Capital Power Corp. (TSX:CPX), and Artis Real Estate Investment Trust (TSX:AX.UN)–three companies with yields of 7% or more.

| More on:

In today’s world, it’s tough to get sustainable income, at least from the usual sources.

GICs, bonds, and other traditional sources of income still exist, but yields are pitiful. A decade ago, GIC rates were higher than 4% if you locked up your money for five years. These days they barely pay half of that, despite the environment getting more competitive.

So investors have reacted exactly how you’d expect. They’ve moved to the stock market, buying up shares of our finest blue-chip stocks with the expectation to hold for a very long time.

There’s just one problem. As more and more investors move into so-called quality stocks, the valuations of these companies are starting to get stretched. While their yields still look rock solid, there’s the possibility of some capital losses. At some point, valuations will return to more normal values.

Investors can guard against this by buying stocks that are undervalued today–companies that have a margin of safety. These companies often have higher yields as well since investors have spurned them.

Here are three stocks yielding at least 7% to get you started.

Alaris Royalty

After releasing disappointing earnings in late July, shares of Alaris Royalty Corp. (TSX:AD) plummeted close to 30%. For astute investors, this is a buying opportunity.

There’s a lot to like about the royalty business. The business can be scaled up indefinitely; the only real limit is the company’s access to capital. There’s a lot of profit to be made borrowing money at 3% to exchange for a 12% or 14% return.

There are short-term risks, however. KMH, one of the company’s largest partners, has stopped paying regular distributions. Management is hopeful negotiations will result in Alaris getting most of its money back, but it still recorded an impairment on the investment of $7 million in the latest quarter.

In short, the market is afraid Alaris’s 15 other partners may be riskier than first assumed.

But the company still makes enough to afford its 7.1% dividend, and shares are trading at a reasonable 15.1 times earnings. And if we look further back, the company has a nice record of raising its dividend and increasing earnings.

Capital Power 

The market is finally waking up to the massive earning power of Capital Power Corp. (TSX:CPX), pushing shares of the power producer to 52-week highs. Still, it’s easy to argue shares are undervalued.

Over the last year, the company earned $3.40 per share in free cash flow, putting the company at just 6.4 times that metric. Or, to put it another way, the company earns a 15.8% free cash flow yield. There aren’t many stocks that can boast that in 2016.

The risk is the company’s Alberta-based coal-fired power operations. The NDP government has pledged to rid Alberta of coal-fired power by 2030–a move that will hurt Capital Power’s long-term earnings prospects. But the company will likely get a substantial settlement from the government for its loss–enough to ensure it won’t be in too bad of shape. Besides, it still has more than a decade to keep earning those succulent cash flows from the assets before they’re shuttered.

Shares yield 7.2%, and the payout ratio is just 46% of free cash flow.

Artis 

Artis Real Estate Investment Trust (TSX:AX.UN) is being punished for its exposure to Alberta, even though, as a whole, the company’s portfolio is doing just fine.

The company projects adjusted funds from operations of $1.28 per unit for 2016, putting shares at just 10.1 times this key earnings metric for REITs. That’s cheap, no matter how you slice it.

It also means the company’s 8.3% dividend is sustainable. Dividends for 2016 will be $1.08 per share, which is a payout ratio of 84%. That’s a little high, but it does leave room for error in case Alberta’s economy gets even worse.

Conclusion

Many stocks yielding more than 7% are risky, and, all things considered, these three companies are probably a little riskier than stocks yielding half as much. But I still think they can maintain their generous payouts.

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.

More on Dividend Stocks

Canadian dollars in a magnifying glass
Dividend Stocks

Here Are My Top 3 Dividend Stocks to Buy Now

These top dividends stocks have consistently paid and increased their dividends. Further, this trend will continue.

Read more »

dividends can compound over time
Dividend Stocks

Want a 7% Yield? The 3 TSX Stocks to Buy Today

These TSX stocks are offering high yields of over 7%, making them attractive for investors seeking steady passive income.

Read more »

how to save money
Dividend Stocks

The Smartest Dividend Stocks to Buy With $200 Right Now

These smartest dividend stocks can consistently pay and increase their dividends in the coming years, irrespective of the macro uncertainty.

Read more »

Electricity transmission towers with orange glowing wires against night sky
Dividend Stocks

3 Utility Stocks That Are Smart Buys for Canadians in November

These utility stocks benefit from regulated businesses and generate predictable cash flows that support higher dividend payouts.

Read more »

Start line on the highway
Dividend Stocks

Invest $10,000 in This Dividend Stock for $600 in Passive Income

Do you want to generate passive income? Forget the rental unit! This option will save you the mortgage yet still…

Read more »

Senior uses a laptop computer
Dividend Stocks

1 Reliable Dividend Stock for the Ultimate Retirement Income Stream

TD Bank (TSX:TD) shares are way too cheap with way too swollen a yield for retirees to pass up right…

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

Is Brookfield Infrastructure Partners a Buy for its 4.75% Yield?

Brookfield Infrastructure Partners (BIP) has a 4.75% dividend yield. Is it worth it?

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »