Finding stocks with fat yields is easy; there are plenty of them.
Problem is, those juicy dividends aren't always sustainable. Look no further than the energy sector, where dividend cuts have become commonplace.
Generally, the higher the yield, the greater the requirement for caution.
To avoid unpleasant surprises, the trick is to identify companies of which the outsized dividends are sustainable. A secure dividend requires a solid business model, predictable cash flow and – if you're hoping the dividend will rise over time (which you should) – a strategy for growth.
Here are four companies that yield more than 5 per cent and that, barring something unexpected, have a high probability of not only sustaining their dividends but raising them. Remember that there are risks with every stock, so be sure to do your own due diligence before investing in any security. Consider this list as a starting point for further research.
Algonquin Power & Utilities (AQN - TSX)
Price: $9.44, down 2 cents
Yield: 5.3 per cent *
With operations across North America, Algonquin is really two companies in one: a power producer (with hydroelectric, wind, thermal and solar assets) and a utility operator (distributing electricity, natural gas and water). Thanks to long-term power purchase agreements and the regulated returns of its utilities, the company throws off predictable cash flows. And those cash flows are growing as it expands via new power developments, utility investments and acquisitions, enabling the company to raise its dividend regularly. Algonquin, which declares dividends in U.S. dollars, boosted its payment by 10 per cent in May, and there's almost certainly more where that came from. "We expect the current growth profile to support annual dividend increases of approximately 10 per cent," RBC Dominion Securities analyst Nelson Ng said in a recent note, calling the shares "attractively valued" at current levels.
Pizza Pizza Royalty (PZA - TSX)
Price: $13.24, down 8 cents
Yield: 6.2 per cent
As someone who lives half a block from a Pizza Pizza franchise and regularly finds discarded pizza trays and crusts on his lawn, I can tell you that selling pizza is a steady business – particularly to irresponsible teenagers, apparently. That stability has translated into a steadily growing dividend, including a 1.9-per-cent increase announced in April. Pizza Pizza Royalty doesn't operate the restaurants; rather, it owns the Pizza Pizza rights and trademarks, which it licenses to the chain in exchange for a royalty of 6 per cent of Pizza Pizza's system sales (or 9 per cent in the case of Pizza 73 stores in Western Canada). The slump in the oil patch doesn't seem to have hurt the company – at least not yet. Pizza 73's same-store sales jumped 5.7 per cent in the second quarter and Pizza Pizza's same-store sales rose 6 per cent. Still, the stock is down more than 15 per cent from its 52-week high in March, making the shares look even more appetizing. (Companies with a similar model include A&W Revenue Royalties Income Fund (AW.UN), Boston Pizza Royalties Income Fund (BPF.UN) and Keg Royalties Income Fund (KEG.UN).
AltaGas (ALA - TSX)
Price: $34.85, down 5 cents
Yield: 5.7 per cent
AltaGas is a diversified energy infrastructure company with interests in natural gas (including gathering, processing and transportation), power generation (coal-fired, gas-fired, wind, hydroelectric and biomass) and gas distribution utilities. The company generates relatively predictable cash flows from its largely regulated and contracted assets, allowing it to raise its dividend regularly – including two increases this year totalling about 12 per cent. The most recent hike, in September, coincided with AltaGas's announcement that it agreed to purchase three gas-fired power plants in northern California for $642-million (U.S.) – a deal that is expected to boost cash flow per share by about 5 per cent in 2016. AltaGas has a conservative payout ratio of 40 per cent to 50 per cent of funds from operations, and analyst Robert Kwan of RBC projects the dividend will grow by about 10 per cent in each of 2016 and 2017.
Brookfield Infrastructure Partners (BIP.UN - TSX)
Price: $52.36, up 25 cents
Yield: 5.3 per cent *
Brookfield Infrastructure owns a large and growing collection of global assets that generate steady cash flows – including railways, toll roads, ports, utilities, pipelines and communications towers. These are essential assets that require huge capital outlays, so they are insulated from competition and tend to appreciate over time. Brookfield Infrastructure's objective is to increase its distribution by 5 per cent to 9 per cent annually, but in recent years it has exceeded that target, including a 10.4-per-cent increase announced in February. The units are "one of the most attractive ways to gain material exposure to global infrastructure without assuming the risks inherent in the more cyclical sectors," Frederic Bastien, an analyst with Raymond James, said in a report. Brazil and Asia, among other regions, offer tremendous growth potential, he said. The Bermuda-based limited partnership declares distributions in U.S. dollars and the amounts consist primarily of foreign dividend and interest income (based on the 2014 tax breakdown). As I've written before (read it online at tgam.ca/Dwbz), I avoid the tax headaches by holding BIP.UN in my registered retirement savings plan.
* Based on conversion of U.S. dollar distribution into Canadian dollars at current exchange rate
Disclosure: The author owns shares of AQN, PZA and BIP.UN personally, and holds BIP.UN in his Strategy Lab model dividend portfolio.