This 10% yield seems dangerous: this is the safer alternative I would buy instead

Dividend stocks are often considered safe because of their regular dividend payments. However, they bear the risk of dividend cuts if the company faces a cash crunch. A warning sign of a cash crunch is the dividend payout ratio. When this ratio exceeds the 90% range, it means that the company is using 90% of its cash flow to pay dividends, leaving little money to reinvest in the business or for unforeseen expenses. When it comes to dividend yield, a high yield does not always have to be dangerous.

The yield is the dividend per share as a percentage of the share price. If the stock price has fallen due to short-term headwinds while cash flows remain healthy, this is an opportunity for value stocks to buy the dip and lock in high returns. However, not all high-yield stocks are buys.

This 10% yield seems dangerous

Timbercreek financial (TSX:TF) shares fell 12% in October after weak third-quarter earnings results. The shares have partially recovered and the dip has increased the return to 10%. This high yield seems dangerous as Timbercreek’s payout ratio exceeded 100% in the third quarter. This ratio has been above 95% for over a year, with hopes that it will drop to 90%.

Timbercreek provides short-term, variable-rate loans to income-producing REITs. In 2023, the lender reported record interest income as its loan portfolio generated 10% interest as the Bank of Canada raised rates. High interest rates reduced loan turnover and increased credit risk, increasing phase 2 and 3 loans and expected credit losses.

When interest rate cuts began in 2024, there was hope for a recovery in loan demand. However, headwind after headwind – first inflation and then the rates war – slowed the recovery in loan demand. These delays are now becoming dangerous as the weighted average interest rate on the loan portfolio continues to decline from 11% in Q3 2024 to 8.3% in Q3 2024. third quarter of 2025.

Interest income is falling faster than the growth of the loan portfolio. The dividend as a percentage of earnings per share (EPS) is 169%, which is not sustainable. Distributable cash flow was higher than earnings per share due to loan repayments. All these signs indicate that Timbercreek may have to resort to a dividend cut if loan demand doesn’t improve. So far, management sees strong demand in the fourth quarter.

A safer alternative

Instead of Timbercreek, there is a safer alternative with high returns Telus Corporation (TSX:T). Telus has a dividend yield of 9.2% as its share price has fallen to a 52-week low. Few investors are afraid of dividend cuts. However, the company has reduced its debt load by selling non-core assets. It has reduced net debt to earnings before interest, taxes, depreciation and amortization (EBITDA) from 3.8 times to 3.5 times. The goal is to reduce the ratio to the target range from 2.2 times to 2.7 times.

Telus has slowed its dividend growth in the face of price competition caused by regulatory changes. The country has also reduced its capital expenditure and will channel that amount into debt reduction. While Telus’ high debt load poses risks, its lower payout ratio indicates the company’s financial flexibility to maintain and even grow its current dividend per share.