Investors chasing high dividend yields may be setting themselves up for disappointment. A high yield can often be misleading — especially when it’s driven by a falling share price. In such cases, not only could the dividend be at risk of being cut, but investors may also be buying into a company with deteriorating fundamentals.
Instead of hunting the highest yield, it’s smarter to seek out strong, stable companies that offer consistent dividend income, even if the yield is more modest. One such opportunity may lie in EQB Inc. (TSX:EQB), a digital-focused Canadian bank stock currently down 11% — potentially opening a window for long-term investors.
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Why Consider EQB?
EQB is a digital banking company involved in commercial lending, mortgages, and wealth management. It operates without traditional branches, giving it a cost advantage over big banks. As of its latest earnings report, EQB manages $137 billion in assets.
What sets EQB apart is its focus on underserved lending markets — particularly uninsured and nontraditional mortgages that many larger banks avoid. This gives the company a unique niche and greater diversification across lending segments.
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At today’s levels, EQB looks attractively valued. The stock currently offers a dividend yield of 2.4% with a very conservative payout ratio of just 22.7%, suggesting its current earnings can comfortably sustain the dividend. It’s also trading at 10.5 times earnings (8.5 times forward earnings) and just 1.07 times book value, making it a bargain by traditional valuation metrics.
Risks to Consider
Despite these positives, EQB’s recent performance hasn’t been without concerns. In its most recent quarter, the company posted a significant decline in operating cash flow — down $2.63 billion over the past year. That’s a red flag for dividend stability, unless there’s a justifiable reason.
Additionally, the company holds a high debt load of $14.21 billion, especially relative to its current market cap of $3.55 billion. Revenue also declined 11% year over year, while quarterly earnings fell by 34.7%.
Still, some of these figures may appear more severe than they are. As a financial institution, EQB operates with large deposit and financing flows, so its cash flow and balance sheet are structured differently than typical corporations. From a banking perspective, its financials may still be in line with expectations.
Strategy: Go Slow and Steady
Given the volatility and short-term risks, investors may want to consider dollar-cost averaging (DCA) into EQB — buying smaller amounts over time instead of making one large investment. This helps manage risk while allowing investors to benefit from any price fluctuations along the way.
In the meantime, investors can collect dividend income and potentially benefit from long-term price appreciation as fundamentals improve.
Bottom Line
EQB may not be a risk-free investment, but its strong fundamentals, niche lending focus, and well-covered dividend make it an intriguing option for long-term income investors. While short-term headwinds exist, those willing to ride out volatility could be rewarded with reliable dividends and upside potential — especially with the stock already rebounding 3% since earnings.
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