This article orignially appeared in the Globe and Mail.

Prior to 2015, things in Canada were looking pretty good. From the beginning of 2012 to essentially the last quarter in 2014, the S&P/TSX composite rose by nearly 27 per cent. There were a few hiccups along the way, which were typically socio-political issues in far off lands (Greece, Russia, etc.), but the markets faced a fairly steady upward trend and investors loved it. What’s not to like? But then things changed. The Canadian dollar fell nearly 15 per cent in 2015 alone, with the help of plunging oil, which fell to the tune of 46 per cent over the last year. We are reluctant to even mention the health care sector and market darling Valeant. To add insult to injury, simply by looking to the south, we can see our neighbours leaving us in the dust when it comes to stock market returns. As purchasing goods and services from the States becomes significantly more expensive and a slowing energy industry acts as an anchor on companies with any exposure to the energy markets and the Canadian economy as a whole, investing is becoming a bit trickier. Those high dividend payers that were towing the line with 100-per-cent payout ratios are looking a lot more risky, now that demand is slowing and cash flows along with it. As cash flows decline and dividend payouts get tighter, companies are faced with a decision to cut dividends, cut capital expenditures or raise money (and dilute current shareholders). With this in mind, we wanted to point out a few (non-energy) high dividend payers that might be in many portfolios but have a dividend that is less than reliable.

Liquor Stores of North America (LIQ):

This is a company we cover at 5i Research and it holds a ‘C’ rating (we use a report card rating system) largely because we do not trust the dividend. The aptly named company, which operates liquor stores, has a large majority of stores located in Alberta (71 per cent as of September, 2015). The alcohol business has been thought to be somewhat recession resistant and we would agree with this notion but it is hard to sell alcohol if no one is around to buy it. Higher hotel vacancies and less activity in oil sand areas means less traffic coming into stores and simply less people living in these areas. To LIQs defense, they are trying to diversify into the U.S., and recently announced some acquisitions, but when you have a high payout ratio and declining sales in your core geography while trying to spend money on growth; something has to give. As of the September results, LIQ had cash of $2.8-million, nine month operating cash flows of ~$0.7-million and dividends paid of $20.3-million over a nine-month period. Year-end 2014 results were a bit better, but the payout ratio was still over 100 per cent even when it is just calculated on operating cash flows which is typically more generous as it does not include capital expenditures that the company makes to grow and maintain the business. LIQ may find a way to maintain the dividend, but we think it will be at the expense of either growth (cutting cap-ex) or current shareholders (dilution from an equity raise).

Rogers Sugar (RSI):

It can be hard for investors to ignore the ‘sweet’ 8.8-per-cent dividend but this stock may put a cavity in investors’ portfolios. RSI is involved in the refining, packaging and marketing of sugar. While RSI looks cheap, volumes are expected to be similar to the recent year, which is not a bad thing, but also means that it will be tough for the company to catch up to the dividend payout ratio. The payout looks a bit better compared to last year, but results also include an extra week of operations, which skews the numbers in favour of the dividend a little. This leaves essentially no room for capital expenditures to help fuel growth. The saving grace for RSI currently is $10-million in cash but this cash balance exists with the help of $29-million in debt being issued, not an ideal ‘cash flow’. The company is looking at export markets but with an economy that seems to be in a low-growth mode at best, barring the U.S., expansion in other markets could be hard to come by. This leaves RSI with little cushion in the case of any downturn.

With growth slowing, investors should leave no stone unturned when it comes to high dividend payers. Many companies with strong balance sheets have been slashing dividends in the name of prudence while the energy sector has seen a swathe of dividend cuts out of necessity. Companies that could issue equity or finance debt on favourable terms in the past may have more difficulty when they go to market next as investor appetites fall with the market. Not every company is at risk and those mentioned above could very well find a way to sustain their distributions but those old-faithful, high-dividend payers are likely due to be put under the microscope.

Please perform your own due diligence before making investment decisions.

In order to remain truly conflict-free, the writer and employees of 5i Research cannot take a position in individual Canadian equities.