Last year, energy company Northland Power (TSX:NPI) slashed its dividend by a whopping 40%. For income investors, that's never good news. But when the market is worried about a high yield being unsustainable, sometimes a cut can actually result in the stock becoming a more attractive buy, as investors become more confident that the business is making the necessary moves to strengthen its financials.
Northland Power now pays $0.72 per share on an annual basis, which translates into a dividend yield of 3.7%, versus the more than 6% that it was previously paying. It still pays investors every month, however, which makes it a bit more attractive of an investment than the average dividend stock that pays just every quarter.
The stock nosedived after news of the dividend cut and in the past six months, it has fallen around 17%. But the bigger issue is the lack of profitability. In the past two quarters, the company has incurred losses, which call into question if even the current dividend is sustainable. If a company is struggling with profitability, that can make any dividend seem risky.
Overall, this isn't a stock I'd buy for its dividend, because there's no guarantee that a further cut may not be coming in the future. Until Northland Power shows some signs of stability and reason for investors to have confidence in the strength of its financials moving forward, it may be better to stay away as there are many other dividend stocks that can make for much safer buys.
