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Yield Hogs: These Are Canada’s 5 Biggest Dividends

Nelson Smith
Updated

Canada’s high-yield stocks have long been popular with many different kinds of investors.

Retirees love big dividends because they represent a tax-advantaged way of paying the bills. Value investors love ’em because a stock with a massive dividend yield is usually unloved by the market. Purchasing such a stock can often lead to great total returns. And passive-income lovers all agree: you can’t beat that feeling you get when that big dividend hits your account.

There’s just one problem, of course. Many high dividends are in danger of being cut. That’s often the reason why the payout looks so good in the first place.

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Let’s take a closer look at the five best dividends in the TSX Composite Index. Will these companies continue to pay? Or are investors about to get sucked into a trap?

AltaGas (TSX:ALA)

AltaGas shares are down nearly 50% over the last year, as investors have almost unanimously agreed that the company’s acquisition of WGL Holdings will turn out to be a stinker. The assets are sound, but AltaGas’s management paid too much and was forced to acquire too much debt to make the deal happen.

But it’s not all bad news for the 13% yield. The company is selling off non-core assets to help fix the balance sheet. New expansion products should add to the bottom line in 2019 and 2020, too. And the company plans to spin off some of the Canadian assets into a separate company, which will further help bring debt down.

Even if AltaGas cuts its dividend in half, investors who buy today are getting shares at a terrific bargain. The company generated $3.30 per share in funds from operations in 2017. Sure, things are different now because of WGL, but the underlying assets still have plenty of value.

Chemtrade Logistics (TSX:CHE.UN)

Chemtrade doesn’t get much attention despite a yield flirting with 10%. That’s a massive payout.

The company provides various chemicals and other industrial products to a vast array of customers. It’s a competitive business, which means margins are persistently low and earnings per share usually look a little lacklustre. Cash flow is a much different story, though.

The good news is, over the years cash flow has been enough to cover the generous payout. But with a large debt load and recent news the company will have to spend $35 million to settle a class-action lawsuit, the dividend may be on shaky ground.

TransAlta Renewables (TSX:RNW)

Thanks to the recent market sell-off, TransAlta Renewables shares currently yield more than 9%.

There’s a lot to like about the company. It’s rapidly expanding in the part of the power generation market you want to be in. It’s in a great spot to buy assets from its parent company TransAlta, a business that needs to shed debt. And the payout ratio is 85%, which should go down over the next couple of years as new projects come online.

I think the company’s dividend is about as solid as you’ll find for a 9% yield.

Vermilion Energy (TSX:VET)(NYSE:VET)

Unlike most other oil and gas producers, Vermilion continued to pay its dividend, even after the price of oil fell from $110 to a low of $30 per barrel. The company rewarded these investors with a dividend raise in 2018, bumping up the monthly payout from $0.215 to $0.23 per share. This translates into an 8.1% yield.

Thanks to its emphasis on low-cost production, Vermilion is gushing free cash flow right now. The company projects it’ll generate $3 per share in free cash flow this year and approximately $4.50 per share next year. This leaves it in a good spot to pay its dividend.

Inter Pipeline (TSX:IPL)

Inter Pipeline shares are down lately because of a couple of reasons. The company’s two main oil sands pipelines transport a lot of heavy oil, which is struggling right now. And the company keeps acquiring new assets, which has caused some to doubt its balance sheet.

But at this point, the 7.8% yield looks to be safe. The company has increased its distribution each year for the past decade and a half, and the payout ratio in 2019 should be between 60% and 70% of funds from operations.

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Fool contributor Nelson Smith owns TransAlta Renewables Inc. and Inter Pipeline Ltd. shares. AltaGas is a recommendation of Stock Advisor Canada. Chemtrade is a recommendation of Dividend Investor Canada.