Is Labrador Iron Ore Royalty’s High Double-Digit Dividend Yield Safe?

The 17% dividend yield of Labrador Iron Ore Royalty Corp. (LIF) viable?

If you think you can earn 17 percent risk-free, I have a Saskatchewan oceanfront property for you to sell.

The first thing you need to know is that Labrador Iron Ore Royalty’s quarterly dividend has been exceptionally volatile over the years. It has been as low as 25 cents in some quarters and as high as $ 2.10, which is the value of the last dividend paid on October 26.

There’s a good reason for this variation: The company’s cash flow and dividends are closely tied to iron ore prices through its 15.1% stake in Iron Ore Company of Canada, including Labrador Iron. Ore Royalty also collects a royalty and commission on sales of iron ore.

Commodity prices are notoriously unpredictable, and iron ore is no exception.

Last spring, the price of iron ore – which is used primarily in steelmaking – hit record highs, and Labrador Iron Ore Royalty subsequently announced significant dividend increases. Since then, however, the price of iron ore has plunged against a backdrop of slowing demand in China – the world’s largest consumer of iron ore – suggesting that the company’s cash flow and dividends are falling. royalties will also go down.

Another indication came this week when Iron Ore Company of Canada, the operating company, declared its own dividend, which is payable on December 23. Labrador Iron Ore Royalty’s share of this dividend is approximately $ 47.9 million, compared to approximately $ 85.7 million in the prior quarter.

The Labrador Iron Ore Royalty share price is also down sharply from its highs, pushing performance into double digits.

Online yield calculators are a handy tool for dividend investors

Should I say CU later to Canadian Utilities?

Yield can be measured in different ways. The 17% figure you quoted is a “trailing yield,” calculated by adding up the four quarterly dividends paid in the past 12 months, then dividing by the current stock price. (By Friday afternoon, the trailing yield had increased to about 17.8 percent.)

The “stated yield” is calculated by multiplying the last quarterly dividend by four to determine a projected annual dividend, then dividing that number by the stock price. Iron Ore Royalty’s reported yield is currently approximately 22 percent.

Such projections are good for stable dividend payers, such as utilities and banks, but not for companies whose fortunes are tied to volatile commodity prices. I’m not saying the stock is necessarily a bad investment at current levels, just that you shouldn’t count on keeping such a rich dividend. The market is also skeptical, which is why the return is so high.

For my Yield Hog dividend growth portfolio model (tgam.ca/dividendportfolio), I generally avoid commodity stocks because their dividends are highly variable. However, I recommend dividend investors supplement their holdings with exchange-traded index funds that provide exposure to commodity producers, technology stocks, and other sectors that typically don’t pay large or stable dividends, but can nevertheless improve portfolio diversification and returns.

Is there an easy way to find the sector weightings of the S & P / TSX Composite Index? I like to compare the performance of my self-directed portfolio to that of the S & P / TSX. This year, I am slightly behind the index, and I would like to determine if that has to do with my preference to avoid certain sectors.

One method is to use an exchange traded fund such as the iShares Core S & P / TSX Capped Composite Index (XIC) ETF as an index proxy. If you go to the XIC page on the iShares Canada website (search the internet for “XIC ETF”) and scroll to “Exposure Breakdown” you will find the up-to-date sector weights for the bottom. As of November 25, the top five weightings were Financials (31.9%), Energy (13.2%), Information Technology (11.9%), Industrials (11.6%) and materials (11.4%).

You can also find a list of individual stock weights on the XIC page. Note that Shopify Inc. (SHOP) is the most weighted stock in the fund – and the index – at around 7.5%. If you don’t have a position in Shopify, which has an annual return of around 44%, that could also explain your portfolio’s underperformance relative to the index.

I’m not suggesting that you should buy Shopify stocks. But if your goal is to keep pace with the S & P / TSX, you can simply buy the index through the XIC or a similar fund such as the BMO S & P / TSX Composite Capped Index ETF (ZCN). With their very low management expense ratios of 0.06%, both ETFs do an excellent job of tracking the index.

Email your questions to [email protected]. I am not able to respond personally to emails but I choose certain questions to answer in my column.

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