5 Cheap Canadian Stocks with High Dividend Yields

November 2023: There are banks, telecom companies, and an energy company in this list of some of the best Canadian dividend stocks. 

Henry Hirschfeld 15 November, 2023 | 2:54AM
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We’re nearly at the holiday season, which means Black Friday is nearly upon us. If you’re on the lookout for cheap Canadian stocks that also have high dividend yields, we have some ideas for you.

Investors love dividends, and it's no secret that dividends can play a crucial role in long-term returns. Thanks to the value of compound interest, if yields are consistently reinvested, returns from dividend stocks can far outperform their non-dividend-paying peers. In fact, as Morningstar’s Daniel Noonan reported, dividends alone accounted for more than 20% of the S&P 500′s total return during the period between 1993 and 2020.

Don’t Pick Stocks Based Solely on Dividends

Investors should not rely solely on dividend yield to pick stocks, however, other metrics are equally important. Some of these include:

  1. Valuation
  2. Economic Moat
  3. Risk and Uncertainty

Some dividend investors may be quick to buy stocks boasting the highest yields. However, it is dangerous when income-seeking investors neglect a stock’s core metrics. As Noonan explains, high dividend yields do not always last, and they may even suggest looming cuts. Just because a stock offers a high yield does not mean that it will outperform in the long run.

Taking other factors into account, such as a company’s competitive edge and its current stock price, would prevent the income-seeking investor from making a hasty buy. After all, purchasing undervalued shares of companies with wide economic moats is a proven winning strategy.

Our Economic Moat Rating represents a company’s ability to outperform rivals and maintain a competitive edge within its market for years to come. Companies with Wide Economic Moats are forecast to fend off competition for 20 years or more. We predict those with Narrow Economic Moats to maintain market dominance for at least the next 10 years.

5 Cheap Canadian Dividend Stocks

To find Canada’s most undervalued high-yield dividend stocks, we scanned the Morningstar Canada Dividend Yield Focus Index, a collection of highly rated, income-generating companies within the Morningstar Canada Index. We identified five names that earn a Morningstar Rating of 4 or 5 stars, meaning that they are currently trading below their fair value estimate. Each of them also benefits from a Narrow Economic Moat, meaning that we predict them to fend off competition for at least the next 10 years. Income-seeking investors may want to take a look at these companies, which our analysts consider well-positioned for long-term growth.    

 

1. TELUS Corp

  • Morningstar Fair Value Estimate: $33
  • Forward Dividend Yield: 6.20%
  • Economic Moat: Narrow

“Our takeaway from Telus’ third-quarter results was strikingly similar to peer BCE’s report a day earlier. Telus posted good telecom results that saw it continuing to add broadband customers to its fiber network and a near-record number of mobile phone subscribers. But Telus’ results also showed signs of increasing wireless competition after Quebecor entered the national market in the spring. Customer churn took a notable tick up, and average revenue per user, or ARPU, declined. The competitive environment and limited ability to expand ARPU have been part of our thesis for the Big Three Canadian wireless carriers. We’re maintaining our projections and our CAD 33 fair value estimate for Telus. We see each of the Big Three as undervalued.

We still believe fixed-line services are where Telus has a bigger advantage, with its fiber network and lack of legacy satellite television customers. Telus added another 37,000 net broadband customers, continuing to steadily increase the subscriber base by about 1.5% every quarter. It also added another 20,000 net television customers. These drove 5% year-over-year growth in fixed data services revenue. Apart from the value we believe Telus’ fiber network has for directly driving fixed-line subscribers and sales, it is also key to giving Telus an attractive bundling offer that can differentiate it for some wireless customers and is leading to other cost efficiencies.”

-Equity Analyst Matthew Dolgin

2. Bank of Nova Scotia

  • Morningstar Fair Value Estimate: $72
  • Forward Dividend Yield: 7.04%
  • Economic Moat: Narrow

“Bank of Nova Scotia (BNS) is the third-largest Canadian-based bank by assets and one of six Canadian banks that collectively hold almost 90% of the nation's banking deposits. It is known as Canada’s most international bank as it derives a little over half of its revenue from Canada, over 40% from international operations, and a single-digit percentage from the United States.

We see cost advantages stemming from three factors: a low-cost deposit base, excellent operating efficiency, and conservative underwriting; regulatory costs are also a factor we must consider. We view the Canadian banking environment as offering systemic cost advantages for the banks in its domain. These advantages manifest themselves in the form of lower operating costs, lower credit costs, lower regulatory costs, and lower absolute levels and better diversification of risk, all of which allow the banks to achieve greater risk-adjusted returns.”

Read more about Canadian banks here.

-Equity Analyst Eric Compton

3. TC Energy Corp

  • Morningstar Fair Value Estimate: $63
  • Forward Dividend Yield: 7.47%
  • Economic Moat: Narrow

“TC Energy’s third-quarter earnings were solid, in our view. After updating our model, our $63 fair value estimate is unchanged. Our narrow moat rating is unchanged. Broadly, we think the firm is making good progress in several areas, including the mechanical completion of Coastal GasLink while maintaining its budget at $14.5 billion, addressing an incremental $3 billion in asset sales, and progressing on the planned 2024 liquids spinoff. Management guided 2023 EBITDA toward the top end of its guided 5%-7% increase over 2022 levels, primarily due to healthy volumes, however, our model had already assumed a strong forecast.

We would expect a more fulsome update at its analyst day on Nov. 28, as management deferred more extensive 2024 commentary on the call to its expected detailed presentation. The most important news out of the quarter was achieving mechanical completion of the Coastal GasLink pipeline slightly ahead of its year-end target while maintaining its CAD 14.5 billion cost estimate. Commissioning is now expected to begin, and it should be ready to deliver gas to LNG Canada by the end of 2023.  On the asset sale and leverage perspective, we see good progress. TC Energy completed its sale of a 40% interest in the Columbia Gas and Columbia Gulf systems for CAD 5.3 billion. Further asset sales of CAD 3 billion are on deck for 2024, likely including the possibility of sales of equity interest in its Mexican or Canadian gas assets. The potential Mexican asset sales would be designed to keep the business at about 10% of the overall business, in line with TC Energy’s risk management efforts.”

-Equity analyst Stephen Ellis

4. Canadian Imperial Bank of Commerce

  • Morningstar Fair Value Estimate: $65
  • Forward Dividend Yield: 6.53%
  • Economic Moat: Narrow

“Narrow-moat-rated Canadian Imperial Bank of Commerce (CM), or CIBC, reported OK fiscal third-quarter results. Adjusted earnings per share were $1.52, representing an 18% decline year over year and 17% decline sequentially, largely driven by outsized provisioning. Results generally fit within the overall pattern we expected for the Canadian banks this year, as we envisioned slowing loan growth, an increase in credit strain, and some pressure on net interest income growth. While revenue and expenses were roughly in line with our expectations, provisioning was a big disappointment. All Canadian banks are seeing some increases in credit strain; however, the increase in provisioning at CIBC was the largest among its peers this past quarter.

The increase was driven by a change in the bank's macro outlook (expecting more strain on Canadian debt service ratios) and increasing reserves and losses on commercial real estate loans, primarily within its U.S. portfolio. Reserves on U.S. CRE office loans are now at 7.6% of loans, which we suspect could still go higher as we have seen some U.S. banks with ratios of 10% or more. Management also admitted that provisioning in 2024 could outpace levels seen in 2019, which would be slightly above what we were projecting for next year. Our main conclusion is that we wouldn't be surprised if provisioning comes in ahead of peers for another quarter or two, with some underlying risk being exposed within CIBC portfolios.”

-Equity Analyst Eric Compton

5. BCE Inc

  • Morningstar Fair Value Estimate: $63
  • Forward Dividend Yield: 7.16%
  • Economic Moat: Narrow

“The Canada Radio-television and Telecommunications Commission announced an initial decision requiring telecom companies to allow resellers access to fiber networks in much of Ontario and Quebec. A review is ongoing, and although we expect mandatory fiber wholesaling to survive the final decision, we expect specifics to evolve. BCE is the only telecom firm materially impacted in Ontario and Quebec. BCE immediately announced that it would reduce fiber capital spending by $1 billion over the next two years. After considering the various ramifications of the CRTC’s decision, we are not changing our $65 fair value estimate.

We believe BCE is successfully using its remaining leverage by deciding to build fiber to fewer homes, though BCE already now passes more than half of the 12 million premises we expected it would eventually reach. The CRTC has set the initial wholesale rates that telecom firms will receive for allowing fiber access, and we see two potential directions for the CRTC to go as it sets longer-term rates. We don’t expect either outcome to make a material difference in our valuation. We expect slower internet subscriber growth in either case, but incremental wholesale revenue will help offset fewer subscribers, and BCE will optimize capital spending for however the regulatory backdrop evolves.”

-Equity Analyst Matthew Dolgin

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Bank of Nova Scotia63.51 CAD-2.35Rating
BCE Inc45.53 CAD-0.68Rating
Canadian Imperial Bank of Commerce64.66 CAD-2.34Rating
TC Energy Corp51.56 CAD-1.36Rating
TELUS Corp21.96 CAD-1.26Rating

About Author

Henry Hirschfeld  Henry Hirschfeld is a Retirement Services Representative at Morningstar in Chicago. He holds a bachelor's degree in Spanish from Kenyon College.

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