ENB:CC - Why I Won't Touch This 18.6%-Yielding Dividend Stock With a 10-Foot Pole
2024-04-09 16:20:00 ET
Do not look at the dividend yield number in isolation. Not all high-yield stocks are worthy of investment. The pandemic and high interest rate environment have left a deep scar in the commercial office space. And True North Commercial REIT ( TSX:TNT.UN ) is using every bit of money and asset to survive. The pandemic introduced the hybrid work culture and changed how office space works. The pure-play commercial real estate investment trust’s (REIT’s) occupancy took a hit, sending the stock down more than 75% from February to November 2023.
Dividend yield = annual dividend per share as a percentage of stock price.
The risk involved in True North Commercial REIT
The REIT first halved its distributions in April 2023 to meet rising mortgage interest. In November 2023, it paused distributions. These strong measures suggested that the REIT is struggling. Its 2023 occupancy rate fell to 89% from 93% in 2022. It sold three of its properties to repay loans. Its portfolio comprised 44 properties at the end of 2023, and this number will fall further as it continues to offload properties when real estate prices are falling.
One thing keeping the REIT running is 77% of government and credit-rated tenants. Right now, its dividend yield of 18.6% is arrived at by taking its distributions from April to November 2023. If its distribution pause continues till November 2024, the yield will fall to zero. There are no signs of revival so far.
Instead of putting your money in a dividend stock that doesn’t pay dividends, invest it in a business with more stability and better cash flows.
A high-yielding dividend stock worth investing in
Slate Grocery REIT ( TSX:SGR.UN ) is a better buy than True North Commercial REIT. While grocery stores don’t earn very high rent as offices, they are resilient tenants that earn you rental income in any economic situation. Whether pandemic, high inflation, or economic downturn, grocers are open. Many retailers open their shops near a grocer to attract consumers. It also has a term, anchored stores, and Slate Grocery REIT enjoys a 94.7% occupancy rate because of these anchored stores and grocers.
Slate Grocery REIT has 117 properties in the United States, earning it a +10% rental spread with every renewal. This significant hike in rent is possible because the supply is limited. While high interest rates and falling property prices are also affecting the net profit of Slate Grocery REIT, it is better placed to withstand the crisis while keeping the distributions intact.
The overall real estate weakness has pulled down the REIT’s stock price by 32% in the last two years while its distribution remained unchanged. This has inflated its yield to 10.25%, creating an opportunity to lock in this yield for years.
Enbridge stock
Another resilient stock worth buying is Enbridge ( TSX:ENB ). It has a dividend yield of 7.67%, which is on the higher end, given that it grows its dividend annually. If you buy 10 shares of Enbridge at $48 per share today, you can get $36.6 in annual dividends. However, the company aims to grow dividends by 3% annually till 2026 and by 5% from 2027 onwards. The company has achieved its targets in the past because of its low-risk predictable business model.
In seven years, this $36.6 annual dividend could grow to $47.2 on your $480 ($48 x 10 shares) investment today, giving you a yield of almost 10% in 2031.
Foolish takeaway
Investing is about being patient and staying invested for the long term . However, it is also important to frequently review your portfolio and exit stocks where the business is in the declining phase.
The post Why I Won’t Touch This 18.6%-Yielding Dividend Stock With a 10-Foot Pole appeared first on The Motley Fool Canada .
Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool recommends Enbridge and Slate Grocery REIT. The Motley Fool has a disclosure policy .
2024