There are a lot of attractive dividends now that the stock market has plunged. Falling stock prices mean higher dividend yields. But there is a catch – companies must maintain their payments for a dividend to be maintained.
Given the economic damage we have already suffered in 2020, it seems likely that investors will have to bear many dividend cuts in the future. I wanted to choose a high dividend security and take a closer look to see if it presented an opportunity or an income trap.
Asset manager based in Montreal Fiera Capital Corp. (TSX: FSZ) caught my eye this week. The stock offers an incredibly high dividend yield: 13%. Last week, the price was 18% lower and the yield hovered around 15%. But can investors really expect this double-digit passive income to continue? Here is a closer look.
Fiera says it is the second largest publicly traded asset manager in Canada. The company offers a wide range of investment strategies. Clients range from retail to institutional to high net worth.
According to the company’s latest report, the vast majority of its customers are located in North America. American and Canadian customers accounted for 78% of revenues last year. They also represent the majority of assets under management (AUM).
AUM reached $ 170 million last year. Fiera earns income by investing this capital and levying performance and management fees. 44% of assets under management have been invested in public equities around the world. Considering the fact that global stock markets went down this month, it seems fair to assume that Fiera’s assets under management could be much lower in 2020.
It also seems likely that some clients, institutional or retail, could withdraw capital this year, which means that the AUM will decrease. Fiera’s performance fees and management fees could be significantly lower. This will have an impact on the stock of dividends.
Meanwhile, the company has considerable debt on its books. Long-term debt was 44% higher than the value of the company’s equity. It was also eight times larger than the company’s cash and cash equivalents.
There is good news in Fiera’s balance sheet. Most of the assets under management (45.6%) are invested in fixed income strategies. These may not lose as much value as the equity or private equity portfolio.
Fiera’s leveraged cash flow, $ 139 million, was more than double its dividend payment last year, or $ 68 million. Cash and cash equivalents, $ 96.2 million, may also cover the dividend.
Fiera Capital has enough leads to maintain its dividend for the next year. However, if the stock market or fixed income market collapsed further in 2020, Fiera’s cash flows could suffer further. If cash flows decrease by 50% or more, the company may have to reduce or suspend the dividend to continue to service its debt.
Investors should not expect a 13% return on stocks. However, even if the dividend is significantly reduced, Fiera could still be considered one of the lucrative dividend shares on the market. If the stock market jumps and the cost of debt drops significantly, Fiera could be the ultimate thwarted bet of 2020.
Keep a close eye on this stock of dividends.
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The crazy contributor VRaisinghani has no position on any of the titles mentioned.