Rogers Sugar (TSX:RSI) is a reliable dividend stock. Today, shares deliver a 7.5% yield. That’s nearly three times the market average.
High dividend yields should always be met with skepticism. The sustainability of the payout might be in question. What good is a big dividend if it gets cut a few months down the road?
But some high yields are fantastic deals. Consider Enbridge, which currently delivers an 8% dividend yield. This business has increased the dividend every year since 1995! The business isn’t built for growth. Instead, it’s built to deliver regular cash flow, which supports the high dividend. In many ways, Enbridge is the ideal dividend stock.
Where does Rogers Sugar fit into all of this? Can you trust the 7.5% dividend yield?
I have good news. Not only is the dividend safe, but there could also be sizable upside in the stock price. We’re talking 50% gains or more.
Know this story
Rogers Sugar used to be called Rogers Sugar Income Fund. At the time, the name made a lot of sense. The company owned a large sugar plantation which required very little capital to maintain. The corporate entity existed simply to redirect annual profits to shareholders. That varied based on the price of sugar, but it was always a reasonable yield.
Everything changed in 2011, when it was converted to a conventional corporation.
Over time, sugar plantations achieve lower yields, meaning profits begin to fall. Companies have two options: they can sell the depleted land, or they can reinvest the profits to continue the business long term.
In this case, Rogers Sugar wanted to continue its strong history as a reliable dividend stock. By 2017, it began acquiring maple syrup businesses for more than $100 million apiece. It was a bold move, but one made with an eye to the future.
Today, the business owns a diversified line of sugar products. Some are pure commodities; others are value-adding products. The result, however, is a company that can continue to generate profits and dividends for another decade or more.
Should you buy this dividend stock?
Rogers Sugar is built for the future. Why then are shares priced at a level that allows for a 7.5% dividend?
First, the company had some bad luck this winter when an inopportune frost destroyed nearly all of its sugar crop. This was a heavy blow, forcing shares down 20%. However, it’s a one-time event, meaning the dividend could be maintained throughout the short-term pain.
The second reason is the coronavirus. Shares fell another 10% during the correction. That’s a lot better than the market overall, but it still served to push the dividend yield even higher.
Long term, I still have faith in this dividend stock. Debt levels are concerning considering the downturn, but as long as the business can ride out the storm, it shouldn’t have any difficulty sticking around for another few decades. Failed sugar crops are rare. Coronavirus corrections are even more rare.
If you’re willing to take on a bit more risk, this looks like a great chance to secure a 7.5% dividend stock. As markets normalize, there should be plenty of capital upside as well.
The post Is This 7.5% TSX Dividend Stock Too Good to Be True? appeared first on The Motley Fool Canada.
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The Motley Fool owns shares of and recommends Enbridge. Fool contributor Ryan Vanzo has no position in any stocks mentioned.
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