10 cheap stocks with healthy dividends

These stocks will likely continue to deliver consistent dividends over the next 10+ years.

Ruth Saldanha 24 October, 2018 | 5:00PM

Almost every long-term investor loves a good dividend. For investors about to retire, dividends provide a steady stream of income. For mid-career or early-stage investors, reinvesting dividends leads to higher long-term returns through the power of compounding.

However, one of the biggest worries that investors seeking dividends face is whether companies will cut their dividend payouts.

For Canadian investors, this has been a top-of-mind worry, as in the past quarter we have seen some high-profile dividend cuts including Corus Entertainment's (CJR.B) 80% dividend cut in June, and  CI Financial's (CIX) nearly halving of its dividend in August.

Morningstar analysts believe that it is possible to accurately predict dividend consistency by using the Morningstar Dividend Yield Focused index family, which uses a forward-looking approach that targets companies with strong financial health and long-term competitive advantages.

The index family uses the Morningstar Economic Moat ratings to measure the sustainability of profits that fund dividends, and distance-to-default metrics to gauge future financial distress. These tools provide a forward-looking view on companies that have the potential to continue with consistent dividend payouts.

"We found that the wider the economic moat and the better the distance to default score, the less likely for a firm to cut its dividend," says Dan Lefkovitz, a strategist in Morningstar's indexes group.

Within this index family, the Morningstar Canada Dividend Yield Focus index is a portfolio of 25 high-quality, dividend-paying Canadian stocks that have a consistent dividend paying history, as well as the ability to pay out dividends in the future.

The constituents of the Morningstar Canada Dividend Yield Focus index are chosen from the Morningstar Canada Index, which targets the top 97% of stocks by market capitalization. From within the Morningstar Canada index, the stocks with the highest dividend yields are screened for the Morningstar Canada Dividend Yield Focus index. However, the dividend must come from qualified income, so real estate investment trusts (REITs) are excluded.

From this list, the index further looks at stocks that have a Morningstar economic moat rating of either narrow or wide. Companies with economic moats have competitive advantages and have the ability to earn high returns on capital. Companies with a wide moat have competitive advantages likely to last more than 20 years, while those with narrow moats have advantages expected to last for 10 years.

Morningstar's Distance to Default metric indicates how likely a firm is to default on its liabilities. It is an indicator of financial health that incorporates information about a company's equity volatility and financial leverage to arrive at a score ranging from zero to 1. A high Distance to Default indicates strong financial health.

The 25 stocks that make it through these criteria are included in the Morningstar Canada Dividend Yield Focus index. Of these, here are the 10 cheapest stocks, based on our fair value estimates:

Name Dividend Yield Fair Value Uncertainty Economic Moat Moat Trend
Enbridge Inc (ENB) 6.12 Medium Wide Stable
CI Financial Corp (CIX) 7.14 High Narrow Negative
TransCanada Corp (TRP) 5.04 Medium Narrow Stable
BCE Inc (BCE) 5.58 Medium Narrow Stable
National Bank of Canada (NA) 4.00 Medium Narrow Stable
Canadian Imperial Bank of Commerce (CM) 4.60 Medium Narrow Stable
The Toronto-Dominion Bank (TD) 3.53 Medium Wide Stable
TELUS Corp (T) 4.51 Medium Narrow Stable
Fortis Inc (FTS) 3.99 Low Narrow Stable
Bank of Montreal (BMO) 3.59 Medium Narrow Stable
Data as of Oct. 22, 2018. Source: Morningstar

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of Montreal97.58 CAD0.28
BCE Inc64.17 CAD0.75
Canadian Imperial Bank of Commerce111.11 CAD-0.04
CI Financial Corp19.47 CAD0.41
Corus Entertainment Inc Class B5.57 CAD4.90
Enbridge Inc46.91 CAD0.47
Fortis Inc55.76 CAD0.40
National Bank of Canada65.33 CAD0.52
TC Energy Corp68.61 CAD1.67
TELUS Corp49.07 CAD0.70
The Toronto-Dominion Bank76.58 CAD0.37

About Author

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca