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RRSP Investors: Don’t Overpay for These 2 Dividend-Paying Stocks

The past six months have been a great run for many investors as the stock markets have reached new all-time highs. However, investors are left wondering if these runs can continue as market uncertainty looms.

As Foolish investors, we try to keep a long-term view and try not to get caught up in short-term swings in the market. However, when adding stocks to our portfolio, we need to wait patiently for stocks of great companies to become underpriced, which is extremely difficult to achieve in strong markets.

Bank of Montreal (TSX:BMO)(NYSE:BMO) and BCE Inc. (TSX:BCE)(NYSE:BCE) are both well-established companies with great long-term prospects. However, do the companies’ current valuations indicate a signal to buy?

Bank of Montreal

Bank of Montreal is the fourth-largest bank in Canada and the eighth-largest bank in North America. It currently holds the longest dividend-payout record of any Canadian company at 187 years. With a payout ratio below 50% and strong profits from all of its operating segments, BMO will be able to continue its dividend streak for years to come.

From a valuation perspective, however, the stock has had a significant run up in the past year. It has increased 33% since late February 2016 and is currently trading just below its 52-week high of 102.39. In addition, the stock currently has a price-to-earnings ratio of 14.7, which is significantly higher than its five-year average of 11.3. Therefore, the stock is quite expensive at current levels.

BCE Inc.

BCE is currently Canada’s largest telecommunications provider. With a 7.6% increase in its free-cash flows, and increases in its wireless and high-speed internet subscribers in 2016, BCE continues to build on its success and grow the company. With a significant amount of cash on hand, investors can expect BCE to continue to service its 4.9% dividend while expanding operations by acquisition.

However, since the company is a market leader and continues to perform well, the stock is trading at a premium valuation. Its current price-to-earnings ratio of 18.4 is above the five-year average of 16.7, and the industry average of 17. In addition, its price-to-book ratio is at 4.1, which is well above the industry average of 1.8. Therefore, investors may want to be cautious about buying BCE at these levels.

Foolish bottom line

If investors decide to acquire these stocks, they will be adding two industry leaders with strong track records of performance. However, if they overpay now, they may have to wait a few years for a company’s earnings to catch up to its current valuations.

It requires great patience to wait for a blue-chip stock to become undervalued. However, good things come to those who wait, and investors will receive significant returns over the long term by keeping their composure and waiting for the right moment to buy.

Fool on!

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Fool contributor Colin Beck has no position in any stocks mentioned.

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