Yahoo Finance 2 Risky Dividend Stocks to Avoid (and 2 Safe Ones)
Written by Puja Tayal at The Motley Fool Canada
Not all dividend stocks are safe. Stocks overall are subject to business, industry, and market risks. As a shareholder, you are a part owner in both profits and losses. If a company is profitable, you benefit from the profit and cash flows. If it is loss-making, your risk is limited to your invested amount. In the Canadian dividend landscape, few real estate stocks have become risky post-pandemic.
Risky dividend stocks to avoid
The lockdowns changed the way people work. While many companies went fully remote, some reduced their office space by adopting a hybrid work culture. In this scenario, pure-play commercial real estate investment trusts (REITs) like True North Commercial REIT (TSX:TNT.UN) and Slate Office REIT (TSX:SOT.UN) faced difficult times.
On the one hand, they saw a reduction in occupancy that affected their rental income. On the other hand, they saw an increase in interest rates that increased their financial cost. In addition, the decline in property prices saw a reduction in the fair market value of the properties. Both the REITs paused their dividend payment to meet interest expenses. They have been selling their non-core properties in a weak property market.
The second-quarter earnings of True North Commercial REIT showed continued deceleration. The REIT has sold six properties in the last 12 months, which has reduced its revenue and funds from operations. It even reported a net loss of $7.5 million. Moreover, its debt is 61% of its gross book value of assets. The REIT’s unit price surged 30% since June when the Bank of Canada began interest rate cuts. However, I would stay away from it until the fundamentals improve.
Things aren’t good for Slate Office REIT, too. It sold four properties in the last 12 months and reported a net loss of $150 million. Its loan-to-value ratio is 73.8%. With such high debt and only a 79.4% occupancy ratio, the REIT’s financial troubles will take some time to resolve.
Safe dividend stocks to invest in
While there are risky dividend stocks, there are also companies that are resilient and continue to enjoy strong cash flows in all economic cycles.
While Slate Asset Management’s office REIT is experiencing losses, its grocery REIT is doing well. Slate Grocery REIT (TSX:SGR.N) continues to enjoy 94.2% occupancy as a majority of its tenants are grocers that have resilient business even in a recession. The REIT’s property count reduced to 116 in the second quarter from 117, but its revenue and net income increased. Moreover, it has a favourable debt level of 51.9% of its gross book value.
As real estate stocks rallied since the June rate cuts, Slate Grocery REIT’s unit price surged over 24% and is now trading closer to its net asset value. While the opportunity to buy the stocks at a discount has gone, you can still consider buying the stock for its 8.68% annual distribution yield. At a payout ratio of 74%, the REIT has sufficient flexibility to pay dividends even in a recession.
Enbridge stock
Enbridge (TSX:ENB) is an evergreen dividend stock you can buy without hesitation. Its low-risk business model and strategic pipeline infrastructure keep cash flows from toll predictable. The stock has surged 15% since the June rate cuts. It is now trading on the higher end of its range-bound momentum of $45-$55. Despite this, it is a good investment for its 6.68% yield. The company plans to accelerate its dividend growth from 3% to 5% in 2026. It can help you earn inflation-adjusted passive income.
I would suggest investing a small amount every month in these stocks to benefit from market volatility.
The post 2 Risky Dividend Stocks to Avoid (and 2 Safe Ones) appeared first on The Motley Fool Canada.
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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.
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