Why Retirees Need to Be Wary of High-Yield Stocks

What you should keep in mind when investing in high-yield stocks, such as NorthWest Health Prop Real Est Inv Trust (TSX:NWH.UN) and Alaris Royalty Corp. (TSX:AD).

| More on:
The Motley Fool

Who doesn’t want to retire with more income? People retire with a nest egg to enjoy. A portion of the nest egg might be invested in high-yield stocks to boost retirees’ income. That’s where retirees got to be careful, because they may be taking on more risk than they think for that high yield. You simply don’t want any dividend-cut surprises.

Know well what risks you are taking when you invest in high-yield stocks. Here are some examples for illustration.

Is there price appreciation potential?

It’s fine for retirees to invest in real estate investment trusts (REITs), such as NorthWest Health Prop Real Est Inv Trust (TSX:NWH.UN), for stable monthly cash distributions. Yet many REITs, especially the high-yield ones, don’t grow very fast, particularly in a rising interest rate environment.

Other than the growth of REITs that should make the underlying stocks appreciate over time, retirees should aim to buy at good valuations to increase their price appreciation potential.

It’s wonderful if you’d bought Northwest Healthcare REIT about three years ago when the healthcare REIT was cheap. However, since then, the run-up of the stock has made it fully valued at best.

Northwest Healthcare REIT’s occupancy is sustainably high, and its payout ratio is reasonable. Therefore, its cash distribution is safe. However, it would be wise to buy on dips at good valuations, so you boost your initial yield, get your income, and increase your price appreciation potential.

Is the business stable? Is the dividend safe?

Alaris Royalty (TSX:AD) stock offers a mesmerizing dividend yield of 8.7%. However, it has been in a downtrend for five years. Investors who’d bought the stock at a high point would be sitting on some substantial paper losses, despite getting an above-average yield.

Fortunately, Alaris Royalty has been sustaining its dividend, but, then again, its run-rate payout ratio has been pushed up to about 98% since it had some problematic revenue streams. Even for Alaris Royalty, which tends to have a high payout ratio, a ratio of 98% is cutting it really close, and it’d be more reassuring to see the ratio closer to 90%.

Thankfully, the company has about $230 million available for deployment into new or existing partners to increase its revenue stream and reduce its payout ratio. For every $50 million that is deployed at 15% (which is the typical yield that Alaris gets from its cash distributions), it’d be an impact of $0.10 per share.

Investor takeaway

When exploring high-yield stocks, ensure the underlying businesses are stable and the dividend is sustainable. Be cognizant of the valuation you’re paying for the stocks. In general, businesses that have some growth are better than those that are merely stagnating.

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 Kay Ng owns shares of Alaris and Northwest Healthcare. Alaris is a recommendation of Dividend Investor Canada. Northwest Healthcare is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

calculate and analyze stock
Dividend Stocks

This 5.5% Dividend Stock Pays Cash Every Single Month!

This REIT may offer monthly dividends, but don't forget about the potential returns in the growth industry its involved with.

Read more »

Silver coins fall into a piggy bank.
Dividend Stocks

How to Use Your TFSA to Earn up to $6,000 Per Year in Tax-Free Passive Income

A high return doesn't mean you have to make a high investment -- or a risky one -- especially with…

Read more »

path road success business
Dividend Stocks

2 High-Yield Dividend Stocks to Buy Hand Over Fist and 1 to Avoid

High yields are great and all, but only if returns come with them. And while two of these might, another…

Read more »

Man holds Canadian dollars in differing amounts
Dividend Stocks

This 7% Dividend Stock Pays Cash Every Month

A high dividend yield isn't everything. But when it pays out each month and offers this stability, it's worth considering!

Read more »

young people stare at smartphones
Dividend Stocks

GST/HST “Vacation”: Everything Canadians Need to Know

The GST/HST "vacation" is a little treat for the holidays, along with a $250 payment. What should you do with…

Read more »

Train cars pass over trestle bridge in the mountains
Dividend Stocks

Is CNR Stock a Buy, Sell, or Hold for 2025?

Can CNR stock continue its long-term outperformance into 2025 and beyond? Let's explore whether now is a good time to…

Read more »

coins jump into piggy bank
Dividend Stocks

The Smartest Dividend Stocks to Buy With $500 Right Now

These top dividend stocks both offer attractive yields and trade off their highs, making them two of the best to…

Read more »

Middle aged man drinks coffee
Dividend Stocks

Here’s the Average TFSA Balance at Age 35 in Canada

At age 35, it might not seem like you need to be thinking about your future cash flow. But ideally,…

Read more »