An +11% Dividend?! What You Need to Know About This Canadian Real Estate Juggernaut

A +11% dividend yield will cause most investors to do a double take. Here is my assessment of Brookfield Property Partners (TSX:BPY.UN)(NASDAQ:BPY).

| More on:

The group of Brookfield companies have always intrigued me, particularly from the point of view of an income investor. Most of the Brookfield Asset Management subsidiaries offer juicy dividend yields. Some offer more than others due to varying valuation hits of late.

In this article, I am going to discuss Brookfield Property Partners (TSX:BYP.UN)(NASDAQ:BPY). Specifically, I will discuss why I would encourage investors to be wary of the company’s high yield.

Yield is not everything

A dividend yield at one point in time is a fickle thing. Using a company’s dividend yield to determine whether or not to buy a stock misses very important aspects of dividend disbursements, which should always be considered. These include historical dividend growth over time and the dividend-payout ratio. Additionally, this includes an assortment of debt equity metrics such as interest coverage ratios and a company’s quick ratio. Taking the entirety of a specific company’s situation at a given point in time and assessing the big picture is the way to go.

On that basis, Brookfield Property Partners’s situation does not look great. As of mid-March, the company’s payout ratio was around 125%, Further, the company’s liquidity metrics were well below one. This is a sign Brookfield will need to add debt or equity soon.

In addition, the company’s massive debt load and interest coverage ratio are by far the least desirable among its group of sibling companies. The company’s double-digit dividend yield thus appears to reflect some serious doubt about BPY’s ability to sustain and grow its dividend over time. This is (obviously) a big negative for income investors.

Business model under significant investor scrutiny

The company’s business model is one driver of this sentiment. The company has high levels of exposure to office and retail (mainly malls) real estate. These two asset classes now being shunned by financial markets largely as a result of the COVID-19 pandemic.

As many of us have seen, working from home and shopping from home really is not as bad as we have previously thought. The transition towards the home office and e-commerce has only been accelerated, and the curve has shifted. Companies like BPY holding a large portfolio of traditional brick-and-mortar retail and office hours simply will not attract capital inflows as in the past. This is despite the high quality of these particular assets.

Brookfield Asset Management could save the day

But wait, there is good news. Brookfield Asset Management, BPY’s parent company, has indicated it will support BPY. However, it is necessary to get the company through these times. Given the deep pockets of BAM, some investors are pricing a “Brookfield put.” This is a cheeky term I coin in reference to the oft-discussed “Fed put” related to the mountains of liquidity being pumped into the financial system post-crisis we have seen.

The backing of BAM makes BPY’s dividend a lot safer. In addition, this significantly reduces the risk of a dividend cut or suspension in the near term. That said, to what degree asset sales or other measures will be needed to shore up BPY’s balance sheet does remain a significant overhang for the stock. The ability of BAM to fix the issues within BPY’s portfolio is thus the bet a long-term investor is making today on BPY stock and should not be taken lightly.

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 Chris MacDonald has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Brookfield Asset Management. The Motley Fool recommends BROOKFIELD ASSET MANAGEMENT INC. CL.A LV and Brookfield Property Partners LP.

More on Dividend Stocks

Make a choice, path to success, sign
Dividend Stocks

Is Fortis Stock a Buy for its Dividend Yield?

Fortis has increased the dividend for 51 consecutive years.

Read more »

Middle aged man drinks coffee
Dividend Stocks

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

BAM stock recently jumped after beating earnings. But is it still a buy, or is it better to wait?

Read more »

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

3 Top Canadian Utility Stocks to Buy in November

Are you looking for some top Canadian utility stocks to own? Here's a look at three must-have options for any…

Read more »

View of high rise corporate buildings in the financial district of Toronto, Canada
Dividend Stocks

Is First Capital REIT a Buy for its 4.8% Yield?

First Capital is a REIT that offers you a tasty dividend yield of 4.8%. Is this TSX dividend stock a…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

TFSA Passive Income: 3 Stocks to Buy and Never Sell

Stocks like Fortis Inc (TSX:FTS) are worth holding long term.

Read more »

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

Canadian Utility Stocks to Buy Now for Stable Returns

Given their regulated business, falling interest rates, and healthy growth prospects, these three Canadian utility stocks are ideal for earning…

Read more »

nuclear power plant
Dividend Stocks

The Best Canadian Stocks to Buy and Hold Forever in a TFSA

TFSA investors can buy and hold these Canadian stocks to generate above-average, tax-free returns over the next decade.

Read more »

Person holding a smartphone with a stock chart on screen
Dividend Stocks

Is Telus Stock a Buy for its 7.3% Dividend Yield?

Although the 7.3% dividend yield Telus offers is attractive, it's just one of many reasons why the telecom stock is…

Read more »