Dividend Danger Zone: 3 TSX Stocks With Sky-High Yields That Might Not Be All That Stable

Investors are advised to evaluate companies with sky-high yields first before buying to avoid dividend traps.

| More on:
Caution, careful

Image source: Getty Images

Should dividend investors be wary of TSX stocks offering sky-high yields? You might be entering a danger zone if you plan to invest in Pine Cliff Energy (TSX:PNE), Gear Energy (TSX:GXE) or Wall Financial (TSX:WFC). The three income companies are enticing prospects, although the payouts might be unsustainable.

Ultra-cheap energy stocks

Last year, energy was the top-performing sector due to strong demand and elevated oil prices (more than US$100 per barrel). The 2022 TSX30 List featured 14 energy companies whose profits soared and cash flows hit the roof. However, as of this writing, energy is the only primary sector with a year-to-date loss (-6.37%).

Nevertheless, bargain hunters have ultra-cheap but lucrative options in Pine Cliff Energy and Gear Energy. The former trades at $1.42 per share (-12.57% year to date and pays a 9.15% dividend, while you can purchase the latter at $1 to partake in the mouth-watering 12% dividend.

The $499.75 million natural gas and oil company takes pride in its long-life assets with low decline rates and low operational risk. In 2022, net earnings jumped 33.8% to $108.9 million versus 2021.

However, its sensitivity to changes in the business environment, like declining oil prices, was evident in the first quarter (Q1) of 2023. In the three months that ended March 31, 2023, net earnings declined 67.7% year over year to $4.98 million.

Capital plan re-evaluation

The situation of Gear Energy, a $261.6 million oil-focused exploration and production company, is similar to Pine Cliff. Despite the 6.9% year-over-year drop in net income to $74.98 million in 2022, cash flow from operating activities soared 73% to $89.77 million.

But in Q1 2023, net income fell 68% to $1.99 million versus Q1 2022 due to macro commodity price weakness and inflationary pressure. Management re-evaluated its capital plans and will strike a balance between strong capital returns, production & reserve stability, and continued dividends.

Eye-popping yield

Wall Financial, a $649 million real estate company, engages in mixed-use residential and commercial developments in Canada. Interestingly, the stock is up 73.54% year to date, notwithstanding the uncertainties in the housing market. At $20 per share, the dividend yield is an eye-popping 15%.

In 2022, net earnings reached a record $48.2 million, representing a 229.8% increase versus 2021. Management attributes the increase to the sale of an investment property and improved operations at the managed hotels. It adds that revenue and income from rental apartment operations remain stable.

As of February 16, 2023, the dividend per share is $3, although the dividend range in the past five years is between $1 and $3.

My bet

Declining oil prices are headwinds for Pine Cliff and Gear Energy. Besides the impact on earnings, sustaining high dividend payments becomes questionable. The dividend yield of Wall Financial is too good to true, and I want to avoid falling into a dividend trap.

However, if I invest today, I’d bet on Pine Cliff, whose performance is stellar. The small-cap energy stock had a spectacular run in the last 3.01% years, with an overall return of 997.96%. Gear Energy (439.18%) and Wall Financial (11.3%) fails in comparison during the same period.

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 Christopher Liew has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Paper Canadian currency of various denominations
Dividend Stocks

Should You Buy the 3 Highest-Paying Dividend Stocks in Canada?

A few dividend stocks saw a sharp correction in November, increasing their yields. Are they a buy for high dividends?

Read more »

money while you sleep
Dividend Stocks

Buy These 2 High-Yield Dividend Stocks Today and Sleep Soundly for a Decade

These stocks pay attractive dividends that should continue to grow.

Read more »

Pile of Canadian dollar bills in various denominations
Dividend Stocks

$15,000 Windfall? This Dividend Stock Is the Perfect Buy for Monthly Passive Income

If you get a windfall, after debt investing should be your next top option to create even more passive income!

Read more »

senior relaxes in hammock with e-book
Dividend Stocks

3 Canadian Dividend Stocks for Worry-Free Income

These Canadian stocks have consistently paid dividends, generating a worry-free passive income for investors.

Read more »

people relax on mountain ledge
Dividend Stocks

Invest $10,000 in This Dividend Stock for a Potential $4,781.70 in Total Returns

A dividend stock doesn't have to be risky, or without growth. And in the case of this one, the growth…

Read more »

ETF chart stocks
Dividend Stocks

2 Top TSX ETFs to Buy and Hold in a TFSA Forever

Don't get crazy. Just think simple growth with these two ETFs that are perfect in any TFSA.

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

How to Use Your TFSA to Earn $900 Per Month in Tax-Free Income

This covered call ETF plus a TFSA could be your ticket to high tax-free passive income.

Read more »

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

How to Turn a $15,000 TFSA Into $171,000

$15,000 may not seem like a lot, but over time that amount can balloon into serious cash.

Read more »