When you’re evaluating high-yield dividend stocks, it’s easy to get distracted by the interest rate flashing on the screen. But the smartest dividend investors know that the story is never just about the number, but about how sustainable that payout really is. Here’s what you need to consider before getting into high-yield stocks.
Considerations
Start with the sustainability of the payout. A high dividend may seem attractive, but if it’s funded by debt or one-time profits, it can disappear quickly. Check the payout ratio; anything consistently above 80% is a warning sign. Investors want dividends backed by reliable, recurring income, not financial gymnastics. Next, examine cash flow, not just profits. Dividends are paid in cash, not accounting profits. A dividend stock may show healthy net income but weak free cash flow when you factor in capital expenditures or debt service. The best dividend stocks generate ample free cash flow quarter after quarter, even when economic conditions get tough.
Additionally, look at debt levels and interest coverage. Many high-dividend companies borrow heavily to finance expansion or maintain payouts. When interest rates rise, those debts become expensive. Check whether the company can comfortably cover its interest payments from operating income. A low or declining interest coverage ratio indicates that the dividend could be at risk if interest rates remain high.
Industry stability is another big factor. High-yield energy, telecom and utility companies often hold on because their services are essential and cash flow remains predictable. On the other hand, high-yield names in cyclical sectors could see payouts fall as demand falls. Stick to industries where sales are stable across economic cycles if you rely on dividends for long-term income. Furthermore, these should offer more growth potential and also deliver future dividend growth.
OLY
Now let’s look at two dividend stocks that may not have the highest yields, but do offer the highest payouts. Olympia financial group (TSX:OLY) is currently at $7.20 per share. The financial services company operates primarily through its subsidiary Olympia Trust Company and offers trust services in multiple provinces. It is not a large bank, but rather a niche company in the field of trust & services. The country’s size, business model and growth potential are modest compared to those of large financial institutions.
At the time of writing, the dividend stock offers monthly dividends of $0.60 per share, which works out to $7.20 per year. The payout ratio is a reasonable 75%, making the 6.3% yield look quite attractive. The free cash flow margin is also 24%, while the operating margin is 29%. These are also decent.
However, there are problems. OLY has not seen strong dividend growth after a significant increase in 2023. Moreover, its business model is niche and smaller in scale. Therefore, the country may face more headwinds than large diversified banks. And because it pays out such a high percentage of profits as dividends, there is less opportunity for reinvestment, which can bake in slower growth. All told, it has many of the features you’d expect from an income stock, but it’s not risk-free.
FFH
Another option to consider is Fairfax financial holdings (TSX:FFH) with an annual dividend of $21.59 at the time of writing. FFH is a diversified insurance and investment company. Through its subsidiaries, it provides property and casualty insurance and reinsurance, plus investment management, worldwide. The investment component also involves exposure to market and investment performance risks.
The company offers very strong earnings and book value growth, with a low dividend payout ratio. The dividend is therefore very well covered by profits. Additionally, the company is diversified through insurance and investments, providing multiple revenue streams. And considering it’s worth just 8.9 times earnings, it looks fairly valued, too.
The thing is, the dividend yield is quite low at just 0.93%, so you’re getting into this dividend stock more for growth than for income. Additionally, dividend growth has been modest year over year, so you’re not seeing strong dividend growth either. Since the yield is so low, it really depends on what you’re looking for. A financially strong company? Bill. A high dividend provider? Not so much.
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