Avoiding Dividend Traps: 2 High-Yield Stocks That Are the Real Deal

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Written by Adam Othman at The Motley Fool Canada

Dividend investing can be an excellent way to put your money to work in the stock market and grow your wealth. However, investing in just any high-yielding dividend stock is not the correct way to do it. For the most part, companies paying high-yielding dividends to investors are potentially troubled businesses.

Fortunately, there are companies with high-yielding dividends, but the fundamentals are solid enough to support their payouts. A dividend value trap is when you invest in shares of a high-yielding dividend stock only to see your investment returns decrease in value due to the underlying company’s troubles.

To avoid dividend traps, you must take a closer look at high-yielding dividend stocks to identify those with more potential to deliver better returns than others. Today, we will discuss two high-yielding dividend stocks that might be safe to invest in right now.

Manulife Financial

Manulife Financial (TSX:MFC) is a $43.40 billion market capitalization multinational financial services and insurance company. Headquartered in Toronto, it has operations in Canada, Asia, and the United States. With interest rates high, some businesses are better positioned to enjoy greater cash flows.

Manulife is a cash-rich business with a low debt-to-equity ratio and steady cash flows. With no reason to take on high-interest debts, it can continue benefitting from stable cash flows to provide safe and stable returns to its investors. As of this writing, Manulife stock trades for $23.88 per share, boasting a juicy 6.11% dividend yield that you can lock in at current levels.

Bank of Nova Scotia

Bank of Nova Scotia (TSX:BNS) is another pinnacle of stability and security for dividend-seeking investors. The third largest of the Big Six Canadian banks, Scotiabank stock has a $67.46 billion market capitalization at writing.

As of this writing, it trades for $55.97 per share, boasting a 7.58% dividend yield. Its downturn from a 52-week high of $74.41 per share has inflated its dividend yield to previously unimaginable levels.

With rising interest rates, it can benefit from higher returns through loans. However, higher interest rates bring the caveat of increased loan default risk. For the third quarter (Q3) in fiscal 2023, the bank set aside $800 million for potential loan losses, twice the amount for the same period last year.

While its share prices might be down significantly in the last few months, Scotiabank stock is well-capitalized enough to weather the storm. Potentially oversold right now, it can be an excellent pick for investors who want to lock in high-yielding dividends.

Foolish takeaway

When the market is volatile, share prices can decline across the board. Sometimes, many healthy companies go through a downturn with the broader economy due to panic-fueled selloffs. Due to share prices going down, the dividends these companies offer become inflated.

Investing in reliable dividend stocks at discounted valuations can help investors lock in higher-than-usual-yielding dividends and get better value for money on their investments.

To this end, Manulife Financial and Scotiabank stock can be two excellent picks for any self-directed portfolio.

The post Avoiding Dividend Traps: 2 High-Yield Stocks That Are the Real Deal appeared first on The Motley Fool Canada.

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Fool contributor Adam Othman has no position in any of the stocks mentioned. The Motley Fool recommends Bank Of Nova Scotia. The Motley Fool has a disclosure policy.