This is a guest contribution from Harvi at Hashtag Investing
Dividend investing is a great way to ensure that you create passive wealth during both bull and bear markets. Dividend stocks are companies that pay out a part of their profits to their shareholders. Dividend investing is favored by many investors because it gives them the benefit of passive income plus long-term capital gains as the value of the stock rises over time.
Investors who have a low-risk appetite generally purchase dividend stocks. Investors who want a part of their portfolio in ‘safe’ territory also opt to buy a certain amount of dividend stocks. However, as with every investment, one has to be wary about investing in the right companies.
Here are 5 Canadian dividend stocks that are undervalued, and will likely deliver long-term stock price appreciation as well.
Table of Contents
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- Undervalued Canadian Dividend Stock #1: Royal Bank of Canada (RY)
- Undervalued Canadian Dividend Stock #2: BCE Inc. (BCE)
- Undervalued Canadian Dividend Stock #3: Northland Power (NPIFF)
- Undervalued Canadian Dividend Stock #4: Freehold Royalties (FRHLF)
- Undervalued Canadian Dividend Stock #5: European Residential REIT (ERE.UN)
Undervalued Canadian Dividend Stock #1: Royal Bank of Canada (RY)
Royal Bank of Canada is one of the leading banks in Canada. After losing close to 10% of its value, the Royal Bank stock is now highly undervalued and is close to its 52-week low. This could be a great buying opportunity when you consider that banks usually do well when interest rates move up.
Also, Royal Bank’s second-quarter results were not that bad. Though there was a 3.4% reduction in the revenues, net income was up by 6% YOY to $4.3 Billion. Its provision on performing loans was higher by $244 million driven by the reduced uncertainty in the market.
Royal Bank’s acquisition of UK-based Brewin Dolphin has helped it to diversify its geographical business. This acquisition has also helped the bank to create better value for its clients, especially for ones having complex needs, thereby enabling it to attract a greater number of high-net-worth clients.
Back in the second quarter, it had returned about $3.6 billion to its shareholders in the form of dividends and stock buyback. The stock has a forward dividend yield of 4.05%. It closed June 24 at $124.34, making it very attractive for passive income investors.
Undervalued Canadian Dividend Stock #2: BCE Inc. (BCE)
BCE is a telecommunication provider that primarily operates through three segments: Bell Wireless, Bell Wireline, and Bell Media. Just like most stocks due to the ongoing broader market correction the BCE stock has ended up losing around 10% of its value in the second quarter.
In its latest quarter report, BCE has depicted strong performance across the segments. Its total revenue has increased by 2.5% YOY to $5.85 billion. Notably, the company’s wireless segment had experienced the best quarterly organic revenue growth in the past 11 years. Moreover, along with the strong revenue growth, lower operating costs had helped the company experience a 15.2% YOY growth in its quarterly adjusted earnings even in this bearish market.
Further, BCE’s future prospects are attractive as well. The company has been aggressively investing to expand its fibre internet and 5G network even more. By the end of this year, about 80% of the Canadian population is expected to use its 5G service. Further, around 900,000 new broadband connections are expected to be established within this year. The stable cash flows it generates will help it to continue with such an expansion approach for a longer time.
BCE’s forward yield presently stands at 5.88% and its expansion plan depicts it will be able to continue paying dividends at a healthy rate in the coming times. The stock closed June 24 on $63.28 and the average analyst price for the stock is $69.12 which makes it a healthy 10% potential upside from its current price.
Undervalued Canadian Dividend Stock #3: Northland Power (NPIFF)
Toronto-based Northland Power is one of the best clean energy companies in the world right now. It operates across Asia, Europe, Latin America, North America and several other global jurisdictions.
The market opportunity for renewable energy companies like Northland Power is immense in today’s world when people are getting increasingly cautious about the growing levels of global warming. Northland may not be the largest company in this segment but it has been steadily expanding its business. One of its development pipelines can potentially double its EBITDA over the coming years. Moreover, the energy crunch in Europe can bring further growth opportunities to the company.
Northland Power has a forward dividend yield of 3.26% and it closed June 24 at $38.55. The average analyst target price for the stock is $46.45 which is a potential upside of around 20%.
Northland Power is currently trading at a highly discounted valuation. Further, the fear of an impending recession also can’t impact the company’s fundamentals as such because it’s been backed by the Government. So, one should buy it for its marketing-beating track record of high dividends as well as the huge market opportunity it is yet to capture.
Undervalued Canadian Dividend Stock #4: Freehold Royalties (FRHLF)
Freehold Royalties is a Calgary-based oil and gas royalty company that has an interest in several oils, natural gas, natural gas liquids, and potash properties across the regions of Western Canada and the United States.
This stock is quite attractive. Even amidst the recent market selloff, it has successfully provided dividends yielding 3.2%. Also, compared to most energy stocks Freehold Royalties is not prone to that much risk as it receives royalties routinely from the companies that are operating on its land as a percentage of their production.
Moreover, the company’s funds from operations have more than doubled in the first quarter of this year and the payout ratio has also increased to 38% compared to 24% in the year-ago period. The royalty revenue also increased 136.7% to $87.6 million while the Net Income rose 581.4% year over year to $38.39 million. The company’s management is confident about the coming quarters because of the ongoing favorable pricing environment.
Undervalued Canadian Dividend Stock #5: European Residential REIT (ERE.UN)
European Residential REIT is an unincorporated, open-ended real estate investment trust which is the only European-focused multi-residential REIT in Canada. It invests in several high-quality multi-residential real estate properties in the region of the Netherland and its portfolio consists of 137 multi-residential properties with 5,865 suites and ancillary retail spaces. Therefore, if anyone wants to get exposure to the housing market in the Netherlands investing in this REIT will be a great way.
The European Residential REIT has lost close to 15% this year so far and is currently highly undervalued. So, it is one of the cheapest REITs in today’s market that has strong prospects. It has a low vacancy with a good growth rate in the rentals. As a result, it is experiencing good single-digit growth in its earnings as well. Further, in several aspects, the growth and quality of this REIT are superior to many of its peers.
Another reason to buy the European Residential REIT stock is because it also provides decent dividend payments. Presently, its dividend yield comes to a decent 4.28% which is quite good keeping the current market condition in mind.
The Final Takeaway
The ongoing pandemic has led to a sell-off in several sectors including REITs, energy and retail. This suggests several of the stocks mentioned in this list are trading at attractive valuations and should derive outsized gains in 2021 and beyond, making them a solid bet for income, value and contrarian investors.
Another bullish scenario is that value stocks could finally outperform growth stocks in the near future so these are stocks you definitely want to have on your radar.
Further Reading: U.S. Taxes For Canadian Investors: What You Need To Know
Other Dividend Lists
The following lists contain many more high-quality dividend stocks:
- The Dividend Aristocrats List is comprised of 65 stocks in the S&P 500 Index with 25+ years of consecutive dividend increases.
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 44 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.