6% Yields and Dividend Growth? You Bet!

The naysayers will tell you that every high yield dividend stock is somehow a scam, a company that is just itching to slash the payout once it runs into the least amount of trouble.

The truth is much more complicated. I’m the first to admit that a stock with a 3% yield is likely much safer than one with a 6% payout, at least from a purely dividend perspective. That’s just math, and it’s pretty hard to argue with math.

The problem becomes when people take that logic to the extreme and proclaim ALL high yields to be unsafe. Stocks are just like people — they’re unique, and they have their own individual stories.

Some offer incredibly consistent cash flows, while others are more volatile. Some own good assets, while others don’t really have a moat. Some have growth potential, while others might be slowly melting ice cubes.

A dividend yield is just a small part of an otherwise complex story. Rather than digging into the company and figuring out what’s going on, lazy investors will simply make a conclusion based on the yield.

Needless to say, I’m not a fan. In fact, I think that investors who completely ignore high yield stocks do so at their peril. They’re a terrific way to add a little bit of income to an otherwise very conservative portfolio.

Today I’m going to feature four high yield names that not only offer 6% yields, but also have the potential to hike those dividends in the future. Let’s take a closer look.

Alaris Equity Partners Income Trust

Alaris Equity Partners (TSX:AD.un) provides alternative financing to private companies (which it calls partners) in exchange for distributions. It focuses on old-school companies with growth, high margins, and lots of cash flow. Rather than investing via debt — as most of its peers do — Alaris prefers to invest in preferred shares. That gives it some extra yield, while giving portfolio partners additional flexibility.

Deals include a growth provision, which is usually linked to revenue. As the top line goes, so does the income flowing back to Alaris.

The business has grown nicely over time, although it has encountered a few issues. The main one is that sometimes a partner doesn’t deliver the agreed upon income stream. Alaris will be generous with its partners if business is temporarily bad, and will allow them to defer payments. This has happened a few times in the past.

Alaris also allows partners to buy their way out of the deal, usually by paying a premium above the initial investment. It’s a nice outcome, with Alaris getting both capital gains and income. But it does come with one downfall. Alaris has to reinvest that capital at a decent rate of return to maintain earnings. Sometimes that takes a little longer to happen than expected, and shares tend to trade lower until deals are announced.

This is exactly what happened in the 2023-24 period. Earnings fell from a high of $2.93 per share in 2023 to $2.71 per share in 2024. Additional declines are expected this year, but the bottom line is expected to rebound in 2026 and 2027 as more capital is put to work.

The company has another interesting growth avenue I’ll mention. It has begun doing its strategy for third-party investors, acting as a manager for institutions who want exposure to smaller companies. This is a virtually limitless business, and it meshes really well with the existing operations. I see further growth in this part of the business going forward.

In the meantime, Alaris shares yield approximately 7% and offer a payout ratio is the 60% range. That’s attractive.

First National

At times it can feel pretty lonely being a First National Financial (TSX:FN) bull. I swear there are only about three of us who even pay attention to Canada’s largest non-bank lender.

First National was created by Stephen Smith and Moray Tawse (an awesome name if I’ve ever heard one) back in the 1980s. Both are still involved in the company today, and they own 37% and 34% of shares, respectively.

Smith and Tawse saw that mortgage brokers were the future, and so the two founders decided to exclusively cater to that growing market. The company has no branches and no frontline employees. Mortgages are underwritten in a series of regional offices, and salespeople will visit brokers on their turf.

The company was a fintech before anybody even knew what that was. It embraced technology from the early days, and created Merlin in the 2000s. This allowed brokers to submit their paperwork electronically, and it enjoyed a lead for years before other lenders eventually followed suit.

I could go on all day about why I think First National has an excellent business model. Instead I’ll just invite those who are interested to read more about the company here.

In the meantime, First National shares yield a hair above 6%. The current dividend checks in at 6.1%. But that’s a little misleading, since the company is famous for shipping out special dividends. Including last year’s special dividend of $0.50 per share, the trailing yield is closer to 7%. Dividend growth has been excellent as well, with the company increasing the monthly payout every year for the past 11 years.

Canadian Tire REIT

I might be stretching this one a bit, since Canadian Tire REIT (TSX:CRT.un) only offers a 5.97% distribution yield as I write this, but screw it. It’s my newsletter, and I make the rules.

As you can probably guess, Canadian Tire REIT owns a bunch of Canadian Tire stores. It was spun out of its parent company back in 2012 as a way for Canadian Tire to raise capital, lessen its exposure to real estate, and to give investors the opportunity to own some of Canada’s best retail real estate. The parent also retains a large ownership position in the REIT.

A big problem in the REIT world are REITs that continue to get bigger, but don’t actually grow earnings per share. CT REIT has a nice record here that surpasses most of its peers. It has grown AFFO per unit by 4.7% annually since the IPO. Net asset value per unit has grown by 3.7% annually, and the distribution has increased by an average of 3.2%. Sure, that pales compared to a lot of high growth stocks, but they don’t offer 6% yields. Canadian Tire REIT does.

The REIT also has one of the better balance sheets out there, operating at a debt-to-assets ratio in the 40% range. This, combined with a relatively low payout ratio (the payout is under 75% of AFFO, which is lower than average for Canadian REITs), help the REIT grow by acquiring Canadian Tire-adjacent real estate — either from the parent or third-party sellers. Plus, growth also comes from raising rents (1.5% annually on average), developments, and buying back shares.

This one is trading at close to a 52-week high, which concerns me just a tiny bit. I’d rather buy when it’s closer to a 52-week low. But the quality is there, and I think you do just fine over time — even if you do buy at a somewhat elevated level.

Brookfield Renewable Partners

I’m writing this on Canada Day, when Brookfield Renewable Partners (TSX:BEP.un) shares yield a hair above 6%. I’m editing it on July 2nd, and shares have moved up to the point where the stock only yields 5.95%. Like with CT REIT I’m rounding up, dargbloomit.

Brookfield Renewable owns renewable energy assets around the world, including hydro plants in Quebec, the United States, and South America. It also owns wind and solar-powered assets in North America, South America, Europe, Asia, and Australia.

I really like the hydro portfolio. Those assets will last forever if properly maintained, and maintenance is pretty cheap. Plus, governments love how environmentally friendly hydro assets are. Both are nice tailwinds for the owner.

Plus, Brookfield Renewable is backed by Brookfield Corporation, which is the company’s majority shareholder. Brookfield has a small army of smart financial folks who are looking for various assets that Renewables might be interested in. They wait until those assets are for sale at what they deem to be a reasonable price, and then they pounce.

It’s been a winning formula. The company has grown FFO per unit by 11% annually since 2016. The dividend hasn’t grown quite as quickly, but it has increased by an average of 6% annually since the company debuted in 2001. That’s a nice combination of current yield today and growth in the future.

Additional growth should come from a few different factors. Rising power demand across the globe will lift all utility boats, including this one. Additional growth in Latin America should help Renewables, specifically. And the company has a robust development program, which works hand in hand with various governments to increase renewable energy capacity.

To maximize your yield on this one, buy BEP.un units and stash them in your RRSP or TFSA. Those units pay partnership income, which is taxed higher than dividends. Stashing them in your TFSA or RRSP will ensure you don’t pay any taxes. BEPC shares, meanwhile, pay dividends, but offer a lower yield because of the preferred taxation.

If you’d like to read more about this company, check out my recent Seeking Alpha writeup.

A big announcement

I started Canadian Dividend Investing as a retirement project, basically as something to do. I was investigating Canadian dividend stocks anyway, and writing about them helped the research process. I knew that would help other investors at the same time, so I decided to start this newsletter.

In just a couple of years I accumulated 15,000+ X followers, thousands of free subscribers, and hundreds of premium members. I appreciate each and every one who has helped me make this a nice little business.

When I first started with the premium edition of the newsletter, I had a specific subscriber goal in mind. We’re quite close to that number today, and I realized something. I’m quite okay if it never goes any higher. I’d rather build something that’s special to a relatively small number of people rather than trying to be something for everyone, and trying to grow for the sake of growth. 

It’ll also free up time to do some of the more important things in life, including spending time with the people I care about, playing the most frustrating game on the planet (golf), and, of course, spending more time reading investor presentations and annual reports.

It means that I’m going to cap premium subscribers at right around today’s levels. I’ll only accept new members when we dip back below that number. Based on current attrition rates, that looks to be 1-2 times per year.

If you’ve been on the fence about signing up for the premium newsletter, then act now. I’m giving folks until July 13th at 10pm MST to upgrade.