3 Canadian Dividend Aristocrats With Dangerously High Payout Ratios

Cineplex Inc. (TSX:CGX) and two other stocks all have dangerously high dividend payout ratios.

| 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

At times, investors can be enamoured by the allure of a high dividend yield. For those living off dividends in retirement, a high yield can be appealing, as it provides greater income. However, not all dividends are created equal, and some companies have dangerously high payout ratios. A high dividend payout ratio as a percentage of earnings may be acceptable in the short term, but it is not sustainable and not a good allocation of funds over the long term. This may lead to a dividend cut, suspension, or cancellation.

Canadian dividend aristocrats are TSX-listed companies that have raised dividends for five consecutive years. Investors attribute a certain level of safety to these companies, as they have demonstrated reliable dividend growth over the long term. Unfortunately, historical patterns are not necessarily a precursor to future success. The three companies below all have payout ratios well above 100% on a trailing 12-month basis. Their situations do not improve when looking forward to next year’s earnings.

One company that has garnered plenty of attention recently is Cineplex Inc. (TSX:CGX). Hollywood has taken its lumps, and the box office has been on a steady decline over the past couple of years. This does not bode well for Canada’s largest film exhibition company. The company’s current payout ratio is a hefty 150%. It is also an unattractive 144% based on 2018 earnings. The company’s dividend has also been eating up the company’s cash flows by a greater percentage each year.

Enercare Inc. (TSX:ECI) is engaged in home services and sub-metering businesses. The company’s current payout ratio is a massive 182%, and although it drops to 124% base on its next 12 months’ earnings, it is still painfully high. The company did raise dividends by 4% in early March, but its dividend-growth rate has been on a downward trajectory over the past year. Its payout ratio as a percentage of earnings before interest, taxes, depreciation, and amortization (EBIDTA) has grown to 104% in 2017 from 94% in 2016, which is further reason for concern.

Last on the list is Parkland Fuel Corp. (TSX:PKI). Parkland’s conundrum is the most interesting of the three. It has a current payout ratio of 340% and 329% based on next year’s earnings. The company’s dividend-growth rates are unspectacular and hover between 2% and 3% over the past five years. Parkland is considered a high-growth company which has been fueled by acquisitions. Herein lies the issue. A high-growth strategy, particular one with high capital expenditures or with high acquisition costs, is at odds with a dividend-growth strategy. As opposed to paying dividends to its shareholders, it should re-invest its funds to offset these costs and sustain its growth strategy.

Bottom line

It’s important for investors to understand the sustainability of a company’s dividend. These aristocrats all have a history of raising dividends, but their high payout ratios are reason for concern. This does not necessarily mean they are bad investments, but investors looking for sustainable dividends may be better off looking elsewhere.

Should you invest $1,000 in Cineplex right now?

Before you buy stock in Cineplex, 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 Cineplex 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 Mat Litalien is long Cineplex.   

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 »