A 7% dividend yield can make it look like retirement has been reduced to one pleasantly short equation. Buy stock. Collect 7%. Go fishing.
Then the dividend gets cut. High yield isn’t automatically dangerous, but yield alone tells investors almost nothing about whether the company can keep making the payment.
So before putting a dividend stock into a retirement portfolio, I’d check how much of the company’s earnings are already going out the door.
Coverage first
Suppose a company earns $2 per share and pays a $1 dividend. The payout ratio is 50%. Half the earnings remain available for reinvestment, capital needs, debt reduction, buybacks, or a rough year.
Now imagine it earns $1 but pays $1.10. Something eventually needs to change. That said, different industries use different measures. Real estate investment trusts often rely on adjusted funds from operations. Pipelines frequently discuss distributable cash flow.
For an insurer, underlying earnings can offer a useful view. That’s why Sun Life Financial (TSX: SLF) gets my attention.
A less exciting yield
Sun Life currently pays $0.96 per share quarterly, or $3.84 annually. At writing, it trades at $112.68, which produces a yield around 3.4%. Of course, nobody is knocking over furniture to get at 3.4%.
The coverage makes it more interesting. Sun Life generated $2.02 of underlying earnings per share (EPS) during the second quarter. Against a $0.96 dividend, that implies a quarterly payout ratio of roughly 48%. Underlying net income increased 11% year over year to $1.1 billion, while underlying EPS rose 13%.
The company also finished the quarter with a 145% LICAT ratio, a key measure of capital strength for Canadian insurers. Those numbers don’t guarantee the dividend. They show a company currently producing considerably more underlying earnings than it’s distributing.
Growth helps too
Sun Life isn’t solely a Canadian insurance company. It operates insurance and wealth businesses across Canada, Asia, the United States, as well as asset management. Assets under management reached almost $1.7 trillion during the second quarter, up 10% year over year. Asia remains an important growth engine, while Canadian benefits and insurance provide a large established base.
The dividend has been growing alongside that business. Sun Life increased its quarterly payment to $0.96 from $0.92 earlier this year. It paid $0.84 per share during the first quarter of 2025. That’s the kind of progression I’d prefer when screening Canadian dividend stocks.
Starting income is only one piece of retirement investing. A payout that rises can help future income keep pace with the things retirees discover have also risen, which currently seems to include nearly everything.
Considerations
Sun Life isn’t risk-free because its payout ratio looks comfortable. Insurance claims can surprise, falling markets can hurt asset-management fees, and interest rates, credit losses, policyholder behaviour, and assumptions about future liabilities can move earnings.
The share price also isn’t cheap simply because the dividend is covered. I’d buy gradually and diversify instead of filling an entire account with one insurer. Holding suitable dividend growers inside a TFSA can make the income even more useful because eligible growth and withdrawals remain tax-free.
Bottom line
A 7% yield doesn’t protect investors from a dividend cut. Cash flow and earnings do the heavy lifting. Sun Life’s roughly 3.4% yield looks less dramatic, but its latest quarterly dividend represented about 48% of underlying EPS while earnings continued growing.
I’d take the smaller starting cheque with room behind it. Retirement income works better when the dividend survives retirement too.
