When you’re looking for a high-yield dividend stock as a safety net for your retirement, the goal is not just income, but also trustworthy income. The return may be eye-catching, but what really matters is whether that payout will still be there and growing in five, ten, or twenty years. Here’s what to focus on before adding high-yield stocks to your retirement plan.
What to watch
Start with the payout ratio, which shows investors the share of earnings or cash flow that a dividend stock uses to pay dividends. Anything consistently above 80% is a red flag, unless it’s a utility or real estate investment trust (REIT) with stable, regulated income. A sustainable range is usually 50% to 70%. Additionally, you want consistency in cash flow so you can be assured that dividends are still paid from cash and not accounting income.
You will also want to assess the strength of the balance sheet. Retirees need income that won’t disappear if borrowing costs rise or credit markets tighten. Look for manageable debt levels and strong interest coverage ratios. Then look at the stability of the sector and the business model. Retirees don’t need speculative income, they need industries that people depend on regardless of economic cycles.
Another important factor is dividend history. Companies that have maintained or increased payouts for ten, twenty, or even fifty years in a row tend to have management teams that hold the dividend as sacred. These dividend stocks rarely pursue risky acquisitions or overextend themselves. This allows for future dividend growth potential, which can create compound growth to quietly fund your retirement without the need for constant attention.
PZA
Pizza Pizza Royalty (TSX:PZA) deserves some consideration when all this is taken into account for a retirement income portfolio, especially for someone who wants a monthly income and is comfortable with slightly higher risk. The yield is attractive at around 6% at the time of writing, and the monthly payment structure is a plus. However, due to its high payout ratio of 98%, weaker cash flow coverage and sector risk, it may not be an anchor but rather a consistent income payer.
What looks good for PZA is that monthly dividend, which is certainly helpful for retirement income. Currently the dividend is $0.93 per year, or $0.0775 per month. The company is relatively small and niche, with a royalty model for pizza restaurant operations in Canada, so the payout is outside the utility standard, meaning potentially higher returns if all goes well.
However, the payout ratio is on the high side and cash flow coverage may be weak. Therefore, dividends are not as well covered as we would hope. Furthermore, dividend growth has been minimal in recent years and the company is relatively small. Therefore, it has limited scale compared to major dividend giants, which means less margin for error and potentially more volatility.
All in all, investors will want to look at several items before investing. Will earnings and cash flows match or even exceed the dividend? If the underlying activities falter, the high yield could be at risk. Is consumer demand for their restaurants high? Trends in restaurants, taxes, inflation and labor costs can affect royalty payments.
In short
In short, the best high-yield stocks for a retirement safety net are those that earn money steadily, manage debt responsibly, and have a culture of protecting and increasing dividends. If you see strong cash flow, a healthy payout ratio, a decades-long history of salary increases, and a business model that people depend on every day, you’ve probably found what every retiree really wants. In this case, PZA looks great as a small bet for extra income, but perhaps not an anchor in your portfolio. After all, investors want income that not only pays you now, but also continues to pay you later safely, peacefully and for life.
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