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TFSA Users: $40,000 in This 14.6% Dividend Stock Will Pay You $5,840/Year

Christopher Liew, CFA
Payday ringed on a calendar

People approaching retirement but who feel that their nest eggs are still deficient seek out the highest-paying dividends. Who wouldn’t, especially if time is not your side? One energy stock that is appealing not only to would-be retirees but to TFSA users is Vermilion (TSX:VET)(NYSE:VET).

This $3 billion international energy producer is a generous dividend payer with its astonishing 14.6% yield. You can accelerate the growth of your TFSA and earn huge income on a yearly or monthly basis.

Backdrop

Vermilion belongs in a specific sector within the oil and gas company. It is into the exploration and production (E&P) company of petroleum and natural gas in Canada. Among all its Canadian industry peers, Vermilion is the only company with international exposure.

It focuses and operates in three core regions — namely, Australia, Europe, and North America. Management credits its diversification for higher realized pricing, more stable cash flows, and adaptable project portfolio. The strategy also opens the door to M&A opportunities.

When evaluating stocks, previous performance does not guarantee future performance. Vermilion incurred considerable losses in 2015 and 2016. The company, however, ended 2017 in positive territory. The following year was a breakthrough following a resounding comeback.

Revenue grew by 48.96% in 2018, while net income increased by 355.9% to $271.65 million. At the current run rate, Vermilion should see a revenue and profit growth of 13.6% and 37.93%, respectively. The company expects a respectable finish in 2019.

Potential dividend earnings

Vermilion started paying dividends in 2003. The company increased dividend four times since that time and hasn’t reduced it. Management believes the self-funded and growth-and-income model is the reason why the company creates value for shareholders.

If you have $40,000 to invest in this energy stock, your annual dividend earnings will be $5,840. Every month, your income is $486.67. Assuming that Vermilion can sustain paying the fantastic yield of 14.6% in 10 years, the same investment would increase in value by 391%. In a decade, your TFSA balance would swell to $156,281.

Payout ratio

TFSA investors should understand the inherent risks when investing in high-yield dividend stocks. One helpful tip is to check the payout ratio of the company. The ratio gives you a hint if the dividend is sustainable.

There will be no concern if the payout ratio is in the normal range of 30-60%. However, if the payout goes beyond 60% or even exceeds 100%, there is a risk of a dividend cut. You don’t want to fall into the so-called dividend trap.

Vermilion’s payout ratio stands at 110.8%, which is over the threshold. Some investors are questioning the safety of dividends. Management, however, defends its position by stating that the dividends are safe and they would instead not grow the yield to protect it.

Even if the company cut the dividend, it has substantial assets across the globe, and the resulting dividend would still be attractive, if not good.

Risk tolerance

Dividends and the payout ratio are not the only measures when investing. You can look at the balance sheet and the business model itself. Vermilion has been operating for 25 years, although the industry is facing strong headwinds. It all boils down to your risk tolerance and urgency to ramp your TFSA.

More reading

Fool contributor Christopher Liew has no position in any of the stocks mentioned.

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