Is Labrador Iron Ore Royalty’s high double-digit dividend yield safe?

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Is Labrador Iron Ore Royalty Corp. (LIF)’s 17 percent dividend yield sustainable?

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If you think you can make 17 percent with no risk, I have some seaside property in Saskatchewan to sell you.

The first thing you should know is that the Labrador Iron Ore Royalty quarterly dividend has been exceptionally volatile over the past few years. It has been as low as 25 cents and as high as $2.10 in some quarters, the value of the most recent dividend paid out on October 26.

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There’s a good reason for this variation: The company’s cash flow and dividends are closely linked to iron ore prices, through its 15.1 percent equity interest in the Iron Ore Company of Canada, from which Labrador Iron Ore Royalties also earn royalties and commissions. does. sale of iron ore.

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

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Last spring, the price of iron ore — which is primarily used in steelmaking — hit record highs, and Labrador iron ore royalties subsequently announced some big dividend increases. Since then, however, the price of iron ore has fallen amid slowing demand in China – the world’s biggest iron ore consumer – which suggests royalties will also drop in the company’s cash flow and dividends.

Another sign came this week when Canada’s Iron Ore Company, the operating company, declared its dividend, which is due on December 23. The share of Labrador iron ore royalties in that dividend is approximately $47.9-million, down from last year’s approximately $85.7-million. quarter past.

The share price of Labrador Iron Ore Royalties is also down sharply from its high, which has pushed the yield well into the double digits.

Online return calculator is a useful tool for dividend investors

Should I call Canadian Utilities CU later?

Yield can be measured in various ways. The 17-percent figure you quoted is a “backward yield,” which is calculated by adding up the four quarterly dividends paid over the past 12 months and then dividing by the current share price. (As of Friday afternoon, the previous yield had risen to about 17.8 percent.)

The “indicated yield” is calculated by multiplying the latest quarterly dividend by four to determine the estimated annual dividend, then dividing this number by the share price. The indicated yield of iron ore royalty is currently around 22 per cent.

Such projections are fine 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 it continuing to generate rich dividends like this. The market is also skeptical, which is why the yield is so high.

For my model yield hog dividend growth portfolio (tgam.ca/dividendportfolio), I generally avoid commodity stocks because their dividends are so variable. However, I recommend that dividend investors supplement their holdings with broad index exchange-traded funds that provide exposure to commodity producers, technology stocks and other sectors that do not typically pay large or stable dividends. but can still enhance portfolio diversification and returns.

Is there an easy way to view the sector weighting of the S&P/TSX Composite Index? I love to compare the performance of my self directed portfolio with that of S&P/TSX. This year, I’m trailing the index a bit, and I want to determine if it has anything to do with my preference to avoid certain sectors.

One way is to use an exchange-traded fund such as the iShares Core S&P/TSX Capped Composite Index ETF (XIC) as a proxy for the index. If you navigate to XIC’s page on the iShares Canada website (do an Internet search for “XIC ETF”) and scroll down to “exposure breakdown,” you’ll find up-to-date sector weightings for the fund. As of November 25, the top five weights were financial (31.9 percent), energy (13.2 percent), information technology (11.9 percent), industry (11.6 percent) and materials (11.4 percent).

You will also find the list of different stock weightings on the XIC page. Note that Shopify Inc. (SHOP) is the most heavily weighted stock in the fund — and on the index — at about 7.5 percent. If you don’t have a position in Shopify, which has an annualized return of around 44 percent, that could also explain your portfolio’s underperformance compared to the index.

I am not suggesting that you should buy shares of Shopify. But if your goal is to keep up with the S&P/TSX, you can buy the index only through XIC or a similar fund, such as the BMO S&P/TSX Capped Composite Index ETF (ZCN). Thanks to a very low management expense ratio of 0.06 percent, both ETFs do an excellent job of tracking the index.

e-mail your questions [email protected], I am not able to respond to e-mails in person, but I do select a few questions to answer in my column,

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