Be warned and be wary of dividend stocks with high yields, which could mean the potential for a dividend cut. However, in a world of higher interest rates, high yields have become more attainable.
Because of the dividend tax credit, eligible Canadian dividends received in our non-registered accounts are taxed at lower rates than our job income. This is why every Canadian should consider Canadian dividend stocks for passive income – particularly stocks with safe and sufficiently high yields.
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Canadian dividend stocks with “sufficiently high” yields
What’s a sufficiently high yield? In his book, The Single Best Investment: Creating Wealth with Dividend Growth, Lowell Miller describes a sufficiently high yield as one that is 1.5 times to double the market’s yield. The recent yield for the Canadian stock market, using iShares S&P/TSX 60 Index ETF as a proxy, is 3.2%. So, a “sufficiently high” yield would be 4.8% to 6.4%.
Going beyond the 6.4% could mean investors are taking excessive risk. A dividend cut would almost guarantee substantial downside in the stock price, which could occur way before the actual dividend cut. That said, whether a stock’s yield is within or beyond that window, investors should still investigate the safety of the dividend.
Here’s a group of stocks with high dividend yields that investors can explore for passive income today, including Power Corporation (TSX:POW), Canadian Imperial Bank of Commerce (TSX:CM), and Enbridge (TSX:ENB). They offer dividend yields of approximately 5.8% to 7.9% at writing.
Check for dividend safety
Having a sustainable payout ratio and resilient earnings or cash flow are typically traits that investors should check for in dividend safety. Having a strong history of dividend payments is also a good sign. Additionally, the company in question should not be overleveraged.
Life and health insurance company, Power Corp., has maintained or increased its dividend every year since about 1992. For your reference, its 10-year dividend growth rate is 5.5%, and its last dividend hike in March was about 6.1%. Its sustainable payout ratio is estimated to be about 52% of earnings this year.
As one of the Big Five Canadian bank stocks, CIBC’s dividend is depended on by many income investors. Its 10-year dividend growth rate is 6.1%, and its annualized dividend increase is 5.2% on a trailing 12-month basis.
At writing, CIBC yields 6.5%. Its payout ratio is expected to be about 66% of earnings this fiscal year due primarily to higher provision for credit losses in a higher interest rate environment. When the macro environment improves, you can expect its payout ratio to return to the more normalized levels of about 50%. Both Power Corp. and CIBC have an S&P credit rating of A+.
Enbridge has an investment-grade S&P credit rating of BBB+. It has kept its common stock dividend safe for at least 50 years. It has also increased its dividend for about 27 consecutive years. Its last dividend hike was 3.2% about 12 months ago. Year to date, its payout ratio was sustainable at approximately 66% of distributable cash flow. So, it’s expected to increase its dividend again soon — likely at about 3%.
