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A good risk tolerance is essential for almost all investors, but it's easy to go overboard and bet on stocks that might be too risky. This is more common with growth stocks than dividend stocks, but risky options are present in both categories.
Two stocks with risky dividends
Algonquin Energy and Utilities (TSX:AQN) is a risky dividend stock in Canada because, despite many predictions to the contrary, it cut its payouts for the second time in just three years. The first cut was in 2023 and the second in 2024.
The company was in serious financial trouble, forcing it to sell a significant part of its business. That, coupled with dividend cuts, has driven away many investors and the stock has lost around two-thirds of its market value since its 2021 peak.
Unlike Algonquin, the real estate investment trust (REIT) SmartCentres REIT (TSX:SRU.UN) has yet to cut its dividend, but there was a troubling sign a few years earlier when the REIT stopped increasing its payouts.
The second danger sign is the incredibly high dividend payout ratio to adjusted funds from operations (AFFO), which reached 98.8% over the past six months. Surprisingly, it was even higher before, and it is impressive that the REIT has managed to maintain its payouts. But without a significant inflow of income, dividends could prove too costly.
Now, let's take a look at some safe dividend stocks.
A utility action
Finding Safer Dividend Stocks Than Strong (TSX:FTS) on the TSX can be a challenge. The utility serves millions of utility customers (electric and gas) through 10 different operations across multiple markets. Operationally, it is relatively safe. About 99% of its utility assets are regulated, which generates highly reliable and consistent revenue.
This has allowed the stock to maintain and increase its payouts for decades. It has increased its payouts for 49 consecutive years and is just one year away from becoming Canada's second dividend king.
The 3.9% dividend yield is pretty decent for such a prestigious Aristocrat. It also shows modest growth, although the past five-year performance doesn't reflect this.
A mortgage company
The Canadian bank shares They are among the main options for investors looking for safe dividends in the financial sector, but they are not the only ones. First national financial institution (TSX:FN) is an independent mortgage company, one of the largest mortgage servicing companies in the country outside of the banks that dominate this sector. It is also a well-established Aristocrat company.
It's not just the stock's stellar dividend history that makes it an attractive and safe option, but also the financial sustainability of its payouts. The payout ratio is, overall, quite safe (64% at the time of writing) and the company increases its payouts at a conservative pace every year.
This makes dividend growth quite sustainable over the long term, and it offers a generous 6.3% yield, combining safety with solid return potential.
Silly takeaway
You'd be wise to stay away from risky dividend stocks, though SmartCentres' generous yield and Algonquin's dividend growth potential might tempt you. The two safe-haven stocks are significantly brighter choices by comparison. Fortis even offers more comprehensive return potential than just safe, stable dividends.