One of the first things that investors get drawn to when looking at a dividend stock is a high dividend yield. At first glance, that makes sense. It makes an income goal much easier to reach. If a $10,000 investment is pulling in $1,000 thanks to a 10% yield, that is more appealing than the 3% dividend, right?
The thing is that a 10% yield can be hiding a lot. You can’t assume that dividend payment will continue forever.
What a high dividend yield tells you
Let’s start with what the yield actually is. The yield is the annual dividend per share divided by the share price. What this means is that a yield can rise without the company increasing its payment.
By way of example, consider a stock that pays $1 annually. At $20 per share, that’s a 5% yield. If the share price suddenly falls to $10 and the dividend stays the same, the yield suddenly doubles to 10%.
In this example, you might be collecting more for each dollar invested, but it doesn’t tell you what caused that decline or whether the payout is sustainable.
There are a few recent examples on the market for investors to take note of.
Slate Grocery REIT shows that distributions can stop
The first stock that offered a high dividend yield is Slate Grocery REIT (TSX: SGR.UN). Slate is one of the better-known REITs in Canada. The company owns a portfolio of over 100 U.S. grocery-anchored shopping centres.
These properties have obvious appeal. People need to buy groceries, and those regular visits provide a traffic bump to adjacent retailers also on the property.
The problem here is that a consistent shopping habit doesn’t guarantee a dependable distribution.
In the most recent quarter, Slate’s AFFO payout ratio reached 113.1%. This means that the amount that Slate was paying out exceeded the adjusted funds from operations the company was taking in.
Last month, Slate announced that it was suspending monthly distributions to preserve financial and strategic flexibility during its strategic review.
Then a few days later, Slate announced it was being acquired by Brixmor (NYSE: BRX) and Everview Partners for US$13 per unit in cash. The agreement also called for no more distributions to be paid until closing, which isn’t expected until early 2027.
Slate’s yield was attractive, but investors who counted on those monthly payments now need another source of income.
TELUS shows how an income stream can shrink
TELUS (TSX: T) is one of Canada’s big telecom stocks and it offers a different lesson for dividend investors.
Canada’s telecoms have faced pressure in recent years as higher financing costs have squeezed free cash flow.
And this past July, Telus announced it was cutting its dividend by 55%, bringing the payout down from $0.42 to $0.19 per share. The company stated that the reduction would help to route nearly $2.7 billion toward debt reduction through 2028.
That announcement followed another one several months earlier when Telus announced it was pausing its dividend increases.
As at the time of writing, Telus now yields 6.3%. That’s still attractive enough to catch an income investor’s attention, and the smaller payout leaves Telus more breathing room.
But for existing investors, that cut represents a huge decrease in income. Someone holding 1,000 shares saw their annual income fall from over $1,600 to just $750.
Look beyond the yield before buying
For prospective investors, the real takeaway is to look before buying a high dividend yield stock. If the company can support the payout by generating enough cash, that’s great. If it can’t, that’s a warning sign.
A stock with a high dividend yield can be part of a portfolio. Just do your research.