If you want to own high-yield stocks, you need to make sure that the companies you buy can actually keep paying your dividends. Two Canadian banks, Toronto-Dominion Bank (TD 0.28%) and Bank of Montreal (BMO 0.11%), have proved they can do that. Real estate investment trust (REIT) Annaly Capital Management (NLY 1.07%) has proved that, despite a double-digit yield, its dividend can't be relied on.
Going north for bank dividends
Canadian banks have been hit pretty hard by rising interest rates. One of the biggest reasons is that Canada's housing market has been extremely strong for years, leaving investor concerned that a wave of loan defaults could be on the horizon.
Rising rates, which could lead to a recession, make that concern even more timely. So Toronto-Dominion, also known as TD Bank, and Bank of Montreal, also known as BMO, have both seen their shares slide in 2022. Their stocks are each off more than 10%.
NYSE: TD
Key Data Points
However, the Canadian banking system is famously conservative, highlighted by the fact that TD Bank has the second-highest Tier 1 capital ratio in North America. The Tier 1 ratio is a measure of how prepared a bank is for adversity. The higher the number, the better.
TD Bank's ratio is 14.7%. Now think about this: Only one bank in all of North America is better positioned to deal with economic headwinds than TD Bank. That bank happens to be BMO, which has a Tier 1 ratio of 15.8%.
Both have large and stable positions in Canada with investments in the US. focused on growth. TD Bank has been particularly aggressive in 2022, with plans to buy First Horizon Bank and brokerage firm Cowen. BMO, meanwhile, agreed to buy Bank of the West in late 2021. So these are banks ready for some adversity while still expanding their businesses. And both have paid dividends for more than 150 years -- separately, not combined. Clearly, these Canadian finance giants have survived hard times before and continued to reward investors.
NYSE: BMO
Key Data Points
TD Bank yields 4.2% today while BMO's dividend yield is 4.4%. Each is worth a close look for dividend investors seeking to add reliable stocks to their portfolio.
Unreliable time and time again
At the other end of the spectrum is mortgage REIT Annaly Capital Management. This company buys mortgage-backed securities known as collateralized mortgage obligations, or CMOs. But leverage is a big piece of the puzzle here, with the REIT using its loan portfolio as collateral.
That creates a problem because the value of CMOs changes based on market sentiment, while tending to fall when interest rates rise as they are now. If the portfolio's value falls, a company like Annaly could end up with a margin call and need to come up with additional cash and/or collateral, or be forced to sell assets into what would likely be a weak market.
Annaly is generally considered a well-run mortgage REIT. However, it has cut its quarterly dividend from a split-adjusted $3 per share in 2019 to just $0.88 in 2022. That split, meanwhile, was a recently announced 1-for-4 reverse split, which is typically not a good sign. In this instance, management is probably trying to increase the share price so that institutional investors with price mandates (like insurance companies and endowments) can own the stock.
NYSE: NLY
Key Data Points
Here's the interesting thing about all of this: The yield has long hovered around 10%. That's been true even though the dividend has been falling over time. Since dividends and share price move in opposite directions, the key takeaway is that Annaly's stock price has fallen, propping up the yield. Simply put, if you expect to use the dividend income you generate from your investment portfolio, Annaly's payment can't be relied on no matter how high the yield is when you buy it.
Know what you own
As noted, Annaly isn't a bad mortgage REIT, but that doesn't change the dynamics of the business one bit. If you are looking to create a reliable income stream, you'll want to look for other options.
A good starting place would be conservative Canadian banks like BMO and TD, which have generous yields and long histories of reliably paying dividends, including through the Great Recession and the recent pandemic. The best part with each today, however, is that investors are worried about the kind of market conditions that both of these banks seem well prepared to handle.
