High dividends are a sign of risk, which can make you wonder if the stock is worth the risk. The dividend yield is the annual dividend per share as a percentage of the share price. If a $100 stock pays an annual dividend of $10, its yield is 10%. Often returns increase because the stock price falls, and the stock price falls because of macroeconomic or business headwinds.
So when investing in high-yield stocks, one should look at whether the company can maintain its free cash flow and whether it should cut dividends. Let’s dive deep into it Timbercreek Financials’ (TSX:TF) 9.5% dividend yield and measures the risks and rewards.
Timbercreek Financial’s ultra-high dividend yield
Timbercreek Financial provides shorter-term mortgage loans to income-producing properties in urban areas. Being non-bank, loan approvals are faster, terms are flexible, and interest rates are higher because credit risk is also higher.
Timbercreek mitigates this credit risk by lending to income-producing REITs with regular cash flows on properties in key metropolitan areas with high liquidity.
Most REITs use Timbercreek’s loans as bridge financing for real estate purchases, redevelopment and capital improvements. They repay loans through conventional financing once projects are completed or properties are sold. This time difference creates credit risk because it may take longer to obtain financing or sell properties.
The Bank of Canada’s interest rate cuts lowered loan yields, but revived lending. In the second quarter of 2025Timbercreek increased its net mortgage investments to $1.03 billion from $960.3 million a year ago. It earned a weighted average interest rate of 8.6% on its investment, compared to 9.8% a year ago. It has used 87.4% of its available credit limit and has room to borrow more money.
Timbercreek’s dividend yield is 9.5% as the stock is trading 25% below its February 2022 high of $9.65 and 11.7% below its book value per share of $8.26. The market has priced in Phase 2 and 3 loans, pushing the expected credit loss (ECL) to $2.1 million from $97,000 a year ago.
The risk associated with Timbercreek’s 9.5% dividend yield
The market has priced in the credit risk of phase 2 and 3 loans and a slow recovery in credit activity. Approximately 80.3% of Timbercreek’s loan portfolio has reached its minimum interest rate, which has reduced the impact of future rate cuts.
The worst appears to be over for Timbercreek as it can now secure financing at a lower interest rate. The next step is an increase in credit demand, which is lagging due to uncertainty about the trade war.
To date, Timbercreek has maintained its dividends by paying out 97.8% of its distributable income. However, the payout ratio is 115.4% of earnings per share, taking ECL into account. If high-risk borrowers default, the lender may have to cut dividends or pay dividends from its reserves.
The high return of 9.5% is a premium for the risk associated with a payout ratio of 115.4% from earnings per share.
Is Timbercreek Financial worth the risk?
Interest rate cuts have reduced the cost of funds, but also interest income. The rate uncertainty led to weak macroeconomic conditions that slowed the recovery of real estate loans. US President Donald Trump has ended trade talks with Canada, but that does not appear to have any impact on the Canadian economy due to an upcoming Supreme Court case on the legality of the Trump tariffs.
At best, macro conditions will revive and stimulate lending. That could increase Timbercreek Financial’s stock price by 5% to 7% and maintain its current dividend per share. In the worst case, stage 2 and 3 loans may default and the money is recovered by selling the property. That could lead to dividend cuts and a share price drop of 10% or more.
Timbercreek sees a recovery in its Phase 2 and 3 loans and a gradual increase in lending. The fact that the lender has weathered 2020’s pandemic without a dividend cut makes the stock worth the risk. A $2,000 investment in Timbercreek Financial could earn you $189 in annual dividends.
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