There’s no shame in sticking with Canada’s blue-chip dividend stocks for growth and income.
Investors are encouraged to choose large-cap stocks to avoid getting burned by penny stocks that promise instant riches but are lacking in substance. Although you won’t double your money with a blue-chip overnight, you’ll obtain above-average risk-adjusted returns over time.
If you’re willing to take on a bit more risk for more potential reward, it may be worthwhile to look at some of the TSX prized mid-cap plays. Such mid-caps tend to be mispriced to a higher degree by Mr. Market relative to a name like BCE that every Canadian investor watches like a hawk.
When it comes to Mr. Market’s pricing of mid-cap names, he typically overextends either to the upside or downside like a pendulum that struggles to remain in a static position. As such, the odds of locking in excess risk-adjusted returns are considerably higher for the names that fewer investors pay attention to.
When you look to mid-cap dividend stocks that overextend to the downside, you not only get a chance to score substantial upside, but you also get to lock-in a yield that’s higher than mean levels.
Of course, you need to put in the homework to ensure you’re not left holding the bag in the event of a dividend cut that usually accompanies a significant decline in cash flows for any given period.
Consider a stock like NFI Group (TSX:NFI), which currently sports a 6% dividend yield. The stock suffered a rough past two years, with shares now down over 52% from their all-time highs.
Prior to the collapse in NFI stock, the bus maker that’s better-known as New Flyer Industries had a reputation for operational excellence. As you’d imagine, the business of manufacturing complicated, long-lived assets leaves little to no room for hiccups.
Unfortunately, NFI’s recent stumble is thanks in part to self-inflicted wounds that can’t entirely be blamed on the slowing economy.
In light of management’s expectations that coach deliveries will rebound in the fourth quarter, a quarter of seasonal strength, the stock could be ripe for a slight upside correction as investors shed their fear of prior operational challenges and a bleaker industry environment that’s been plaguing the firm of late.
At the time of writing, NFI trades at 8.9 times next year’s expected earnings and 0.54 times sales, a low price to pay for a large dividend that still looks well-supported by cash flows.
If you’re in the market for a 6% dividend yield for a low price and don’t mind a bit of near-term volatility, NFI may be the stock you’re looking for.
Stay hungry. Stay Foolish.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends NFI Group. NFI is a recommendation of Stock Advisor Canada.