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WHAT ARE WE LOOKING FOR?
Stocks with a high yield, which could indicate a dividend cut is on the horizon.
MORE ON YIELD
Yield is calculated by taking the amount of dividends paid per share over the course of a year and dividing that by the stock's current price. Yields increase as share prices fall, so high yields can be a sign that investors are down on a stock. A yield higher than 7 per cent is often seen as a signal that investors are nervous about a potential dividend cut.
“When yields are above that mark, then it's usually time to start wondering what's going on,” said Joel Neynens, vice-president of Halifax-based Gordon Stirrett & Associates. “At that point, you want to be very cautious and make sure you are buying a good company and that the yield is sustainable.”
TODAY'S SCREEN
We screened the S&P/TSX to find companies (excluding income trusts) with a yield higher than 5 per cent. We also added price-to-earnings and price-to-book value ratios. There are some cheap stocks in this list, but you need to do more research to see if dividends are sustainable.
WHAT WE FOUND
On average, share prices of the dividend-paying companies are down 38 per cent on the year. Biovail Corp., which tops the list with a yield of 17 per cent, recently reassured investors that it had enough free cash flow to sustain the payouts, but warned it would cut the dividend if it needed money to fund an acquisition. The dividend on the next highest-yielding stock – Teck Cominco Ltd. – also looks increasingly in doubt as the company will likely need every penny it can earn to service the almost $10-billion in debt it took on to finance its takeover of Fording Canadian Coal Trust.
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