A good way to fight inflation in a volatile market is to invest in stocks with high dividend yields. However, with inflation in Canada hitting 8.1% in June, the high benchmark makes it difficult to find companies that meet this criterion. Fortunately, Timbercreek Financial (EAST: TF) pays a dividend above inflation.
The Company is a non-bank commercial real estate lender that invests in structured mortgage loans, primarily secured by stabilized, income-producing commercial properties.
Beat inflation with monthly dividends
Timbercreek Financial pays a dividend yield of approximately 8.5% on an annualized basis, made up of monthly installments. By analyzing its historical dividend yield, you can see that it has fallen slightly over the past few years:
At 8.5%, the current yield is near the lower end of the range, indicating that income-oriented investors are paying a slight premium over returns they may have achieved in the past.
However, frequent payments allow investors to reinvest the money more quickly, increasing the total monthly payment faster than if it were paid every three months.
Investors should be aware of the risks
Usually, a stock that pays such a high dividend is not without risk. To begin with, the company focuses its lending operations on commercial real estate. In an environment of rising interest rates, the cost of investing in real estate increases, which tends to reduce the volume of loans. It could also cause some borrowers to default on their loans.
This would impact the company’s growth prospects and potentially lead to a dividend cut. Given that the dividend yield has remained historically high, this means investors are demanding high returns to justify owning TF stock. Therefore, a lower dividend would cause the stock price to fall.
Additionally, with a payout ratio of around 100%, all of the company’s profits are used to pay out dividends. This leaves no safety margin in case earnings decline in the future, and it leaves no room for future dividend increases. In fact, Timbercreek’s dividend per share has remained stable over the past few years.
Analysts see upside potential for Timbercreek Financial
TF stock has a moderate buy consensus rating based on one buy and two hold assigned over the past three months. Timbercreek Financial’s average price target of $9.67 implies 19.5% upside potential.
What type of investor is Timbercreek suitable for?
Timbercreek appeals to income-oriented investors who are confident in the company’s ability to maintain its current dividend in order to fight inflation. Although the company’s stock tends to underperform the S&P 500 (SPX), it is less volatile and provides monthly income.