Written by Tony Dong, MSc, CETF® at The Motley Fool Canada
Let’s get this out of the way upfront: you should never buy a stock just because the dividend yield looks attractive. A high yield can sometimes signal undervaluation, but more often it reflects elevated risk. Whenever you see a payout pushing into double digits, the first question should always be about sustainability, not excitement.
That said, there are industries where high payouts are normal. Timbercreek Financial (TSX:TF) is one of them. The stock’s 10% dividend yield comes from what the company does.
As one of Canada’s mortgage investment corporations (MICs), it lends to segments of the real estate market that traditional banks avoid. These are commonly called B-lender or subprime borrowers. The niche can be profitable, but you need to understand the trade-offs and risks before buying in.
Timbercreek is a non-bank commercial lender. It provides shorter-duration, structured financing solutions to borrowers who need capital quickly and cannot wait for traditional bank approval. Every loan is secured by a commercial real estate asset, giving Timbercreek collateral if a borrower defaults.
A few key metrics help explain this company’s risk profile:
-67.9% weighted loan-to-value (LTV). This means the average mortgage balance is about 68% of the underlying property value. Lower LTVs mean more protection; higher LTVs mean thinner margins of safety.
-56.5% of loan exposure is tied to multi-residential assets, which tend to be more stable than office or retail real estate.
-Average mortgage size is $15.2M, spread across 110 active investments, and about two-thirds of borrowers are repeat clients. Repeat business can signal that borrowers are reliable and value the relationship.
When evaluating any MIC, you want to look at LTV ratios, borrower concentration, asset mix, loan duration, and default history. All of these help determine whether the payout is supported by stable interest income or built on fragile underwriting.
Timbercreek pays a monthly distribution of $0.0575 per share, which works out to a 10.2% yield at recent prices. It is important to remember that high yield does not mean free income. On ex-dividend day, the share price typically drops by the amount of the payout. You must own the shares before and on the ex-dividend date to receive the next distribution.
A yield above 10% tells you the underlying loans carry real risk. MICs lend to borrowers that banks will not touch because their credit profile, project timing, or collateral structure does not fit bank criteria. Timbercreek fills this gap and earns higher interest rates in return. Investors are compensated for taking on elevated mortgage exposure, but that does not make it risk-free.