Written by: Jay Yi, MBA; Edited by: Chris Thompson, CFA, MBA, P.Eng
eResearch | As income investors in Canada and the U.S. continue to face the challenge of a low interest rate environment, the equity market dividends continue to lure investment dollars.
In the U.S., the S&P 500 dividend yield recently shifted higher than the yield on the 30-year U.S. Treasury Bond, and. in the past 40 years, the only other occurrence of this event, happened in 2009, during the financial crisis.
In Canada, the S&P/TSX Composite Index, the benchmark Canadian index comprised of approximately 250 companies and 70% of the total market capitalization on the Toronto Stock Exchange, currently yields 3.4%, well above the 1.6% yield of the Canada 30-Year Government Bond.
In the S&P/TSX Composite Index, there are several companies yielding double-digit dividends however, there are concerns over sustainability and if the high payout ratio is limiting financial and operational flexibility for the companies.
Even when the stock prices declined, driving up dividend yield, the Canadian companies’ management teams remained confident that operating profits were sufficient to pay dividends.
Top 10 S&P/TSX Composite Index Dividend Yields
Below are four of the top 10 dividend yielding companies on the S&P/TSX Composite Index:
Headquartered in Alberta, Canada, Vermilion Energy Inc. (TSX: VET) is an international oil and gas producer with operations in North America, Europe, and Australia.
Vermilion has the highest dividend yield at 14.3% that has increased steadily this year as its stock price has dropped to C$19.34, a 55% decrease from its 52-week high.
In Q2/2019, Vermillion reported operating cash flows of C$170 million, a 48% decrease year-over-year, and continued loss on investing cash flows of C$116 million.
However, on Vermilion’s Q2/2019 conference call, the management team confidently stated the priority to pay dividends and they expect to have the ability to pay 2019 dividends using internally generated cash flows, supported by its strategy in applying forward strip and current hedge positions.
Headquartered in Toronto, Canada, Chemtrade Logistics Income Fund (TSX:CHE) provides manufacturing and distribution services for industrial chemicals including sulphur & performance chemicals, water solutions & specialty chemicals, and electrochemical.
Chemtrade has a dividend yield of 11.6% but its stock price has dropped significantly to C$10.38, a 30% decrease from its 52-week high.
In calendar Q2/2019, Chemtrade reported a loss on operating cash flows of C$57 million, a 14% increase year-over-year, and a continued loss on investing cash flows of C$18 million.
CEO Mark Davis confidently stated in the Q2/2019 conference call that he expects no problems in sustaining Chemtrade’s dividend as he expects the successful execution of business operations will bring down the dividend yield as stock price rebounds higher.
Headquartered in Alberta, Canada, Arc Resources Ltd. (TSX: ARX) is a royalty trust that focuses on the exploration, development, and production of conventional oil and natural gas reserves.
Arc Resources has a dividend yield of 11% but its stock price has significantly dropped to C$5.44, a 63% decrease from its 52-week high.
In Q2/2019, Arc Resources reported a decrease in operating cash flows to C$128 million, a 7% decrease year-over-year, and a continued loss in investing cash flows of C$183.5 million.
CEO Myron Stadnyk mentioned in the Q2/2019 conference call that he is confident of its dividend sustainability, as Arc Resources has managed to sustain lower decline rates compared with competitors Apache, Antero, FANG, and Diamondback.
Arc Resources is taking a longer-term strategy for dividend sustainability as it has been constantly paying down debt, currently at C$550 million this year compared with C$1.2 billion in 2014.
Headquartered in Alberta, Canada, Freehold Royalties Ltd. (TSX: FRU) is a dividend paying energy royalty company providing low risk energy investment opportunities.
Freehold has a dividend yield of 9.1%, which may be the lowest amongst the aforementioned companies, but Freehold has a history of dividend payments for 10 years. Nevertheless, Freehold’s stock price has dropped to C$6.92, a 37% drop from its 52-week high.
In Q2/2019, Freehold reported a drop in operating cash flows to C$27 million, a 4% decrease year-over-year, and a continued loss in investing cash flows of C$30 million.
Both the Canadian Association of Oilwell Drilling Contractors and the Petroleum Services Association of Canada are forecasting material reductions in drilling activity in 2019, but in Freehold’s Q2/2019 conference call, the management team stated that their lands have maintained consistent drilling operations, which will be able to fund its dividend payments.
All of the companies’ management teams had constant questions regarding concerns over sustainability of dividend payments on their conference calls, but each company was very confident that they could maintain payments organically without need of financing.
How long will these companies have to execute on operations and dividend payments until they win back investor confidence and the stock prices rebound accordingly?
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