A buyer’s guide to high-yield stocks

EDMONTON / Let’s call it the six-percent solution. For investors seeking steady returns in a low-interest-rate world, locking in a stock yield of six per cent or more can seem pretty sweet. It’s several times what a typical bank GIC (Guaranteed Investment Certificate) pays, and nearly three times the yield on 10-year U.S. Treasury bonds.

Of course, comparing returns on GICS, bonds and equities can be rather misleading. GIC rates may be puny, but unlike stocks, your capital is never at risk. And while bond prices fluctuate, they’re generally not as volatile as stocks.

Bottom line: if you buy a stock for yield, you’d better be sure you can stomach a bit of volatility.

Another key consideration: before you buy a stock for yield, you’d better make sure the dividend is sustainable. If not — and if a company’s earnings are actually shrinking — investors could be in for a double-barrelled beating.

One, the stock price is likely to fall. And two, the dividend could be cut or even eliminated in future, triggering further declines.

Suddenly, the juicy yield that once looked so enticing is gone, and the share price has sunk. Voila, investors have been sucked into a classic value trap. Fallen stars such as Yellow Media and Le Chateau, both of which enticed investors with rich yields, are just two recent examples.

So today, we’re looking for stocks with an annual dividend yield of at least six per cent, plus decent earnings growth. Here’s what we found.

Several REITS (real estate investment trusts) offer yields of at least six per cent, and some are north of seven per cent.

Toronto-based Dundee REIT (TSX:D.UN) is one of Canada’s biggest, with a market cap of nearly $2.3 billion. Its units have been on a tear since October, closing Friday at $37 apiece on the Toronto Stock Exchange. That’s the highest level in more than four years.

Dundee owns a broad portfolio of office and industrial properties across Canada, including several in Edmonton. It recently announced the acquisition of Whiterock REIT, and followed up with a $201 million equity financing.

Dundee boasts solid revenue and earnings growth, but investors may want to wait for a pullback before diving in.

Several well-known casual and fast food chains offer dividend yields of more than six per cent. The list includes Boston Pizza (TSX:BPF.UN), The Keg (TSX:KEG.UN), Pizza Pizza (TSX:PZA.UN), and national burger chain A&W (TSX:AW.UN).

Edmonton-based liquor retailer Liquor Stores N.A. (TSX:LIQ) also offers a yield that’s north of six per cent.

All of them have had good runs in recent months, and should continue to attract those seeking steady income.

But investors should closely monitor the payout ratios of these firms — a measure of how much distributable cash is actually being dispersed to investors. As a general rule, the lower the payout ratio, the more secure the dividend.

Wajax (TSX:WJX) is a Torontobased supplier of heavy industrial equipment and power system components.

Although it’s not exactly a household name, it’s no small fry either. Wajax recently report a profit of about $64 million or $3.84 a share on revenues of almost $1.4 billion. That’s up from earnings of $56.4 million or $3.39 a share on revenues of $1.1 billion in 2010.

Shares jumped

After hiking its monthly dividend on Tuesday to 27 cents a share — or $3.24 annually — Wajax’s shares jumped sharply this week. They closed Friday at $47.52 apiece, a record high.

Nonetheless, with a current dividend yield of 6.8 per cent, and a trailing price/earnings multiple of just 12.4 times, the shares should continue to offer upside.

The energy infrastructure, distribu- tion, telecom and industrial-products sectors also feature several high- yield plays.

The members of the six per centplus club include names such as Atlantic Power TSX:ATP), Bell Aliant (TSX:BA), Superior Plus (TSX:SPB), Northland Power (TSX:NPI), Just Energy (TSX:JE), Canfor Pulp (TSX:CFX) and Veresen (TSX:VSN), to name a few.

Of these, Superior Plus, Northland Power, Just Energy and Veresen are the only ones that currently sport consensus “buy” recommendations from analysts, based on surveys by Zacks Investment Research.

Of course, if you’re willing to sac- rifice a bit of yield, and move down into the four- to five-per-cent range, the number and quality of names increases sharply.

Telecom giants such as Telus (TSX:T) and Rogers Communications (TSX:RCI.B) boast yields of more than four per cent, and the biggest player in Canada, BCE Inc. (TSX:BCE) has a current yield of 5.3 per cent.

Major media players such as Thomson Reuters ( TSX: TRI) and Shaw Communications (TSX:SJR.B) also sport dividend yields well north of four per cent, and Torstar Corp. (TSX:TS.B), publisher of the Toronto Star, Canada’s largest daily newspaper, sits at a juicy 5.2 per cent.