This 8.4 Percent Dividend Stock on the TSX Is Worth Watching

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Investing in high-yield dividend stocks can be a tricky proposition. Investors should note that a company’s dividend yield and its share prices are inversely related. So, it is quite likely that a high-yield stock will have a beaten-down share price, which might make it attractive to income-seeking investors.

But in addition to a high yield, investors should analyze the reason behind a company’s depressed valuation. Moreover, the dividend payout should also be sustainable across market cycles and provide the company with the flexibility to reinvest in growth projects, target accretive acquisitions, and strengthen the balance sheet.

Considering these factors, let’s see if it makes sense to invest in Alaris Equity Partners Income Trust (TSX:AD.UN), which currently offers a forward yield of 8.4%.

An overview of Alaris Equity Partners Income Trust

Valued at $730 million by market cap, Alaris Equity provides capital to profitable private companies in exchange for a monthly cash distribution on a new preferred equity position. These distributions to Alaris are set 12 months in advance based on an initial investment yield, which is adjusted each year and tied to percentage changes in top-line metrics such as sales or gross profits.

Alaris creates long-term partnerships with companies that have a record of consistent profitability across economic cycles. These private company partners are individual or family-controlled businesses that raise capital from Alaris for growth, generational transfers, partial liquidity, or management buyouts.

Alaris aims to diversify and expand its revenue streams by adding a few new partners every year, in addition to providing follow-up capital to existing partners. It expects to generate organic growth between 3% and 5% each year.

A high dividend yield

Alaris emphasizes that the best companies in the world are never up for sale. Basically, its unique investment structure generates attractive returns from a portfolio of businesses that would otherwise be out of reach for traditional equity investors.

This strategy combines equity-like returns with debt-like protections. For example, based on its existing portfolio, Alaris expects to generate a baseline cash yield of 13% with the potential for incremental growth and gains from capital appreciation. Its scalable business model and low overhead costs result in EBITDA (earnings before interest, tax, depreciation, and amortization) margins of over 80%. Moreover, Alaris has demonstrated a track record of generating realized returns of more than 16% on exited investments.

A high-margin business allows Alaris Partners to shareholders an annual dividend of $1.36 per share, translating to a forward yield of 8.4%.

Alaris reported an adjusted EBITDA of $39.1 million or $0.86 per share in the first quarter, an increase of 28.4% year over year. Its payout ratio of 66% provides the company with enough room to raise dividends further or target other accretive investment opportunities.

Is Alaris stock undervalued?

Analysts tracking Alaris stock expect it to end the year with an adjusted earnings of $2.59 per share. So, priced at 6.2 times forward earnings, Alaris stock is really cheap and trades at a discount of 30% to consensus price target estimates. After accounting for its dividend yield, total returns could be closer to 38.5% in the next 12 months.

Should you invest $1,000 in Alaris Equity Partners right now?

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Fool contributor Aditya Raghunath has no position in any of the stocks mentioned. The Motley Fool recommends Alaris Equity Partners Income Trust. The Motley Fool has a disclosure policy.