2 Dividend Stocks to Buy on Tax-Loss Selling Weakness

Tax-loss harvesting season is upon us. It’s time to shop for bargain dividend stocks like Whitecap Resources (TSX:WCP) for a safe yield of up to 8%!

| More on:
Growth from coins

Image source: Getty Images

Near the end of the year is tax-loss selling season, in which investors sell their losing investments in their non-registered accounts to use the capital losses to offset capital gains, thereby reducing the taxes they have to pay for the year.

Notably, you can also carry capital losses to offset capital gains in the preceding three taxation years or carry it forward indefinitely. For example, you might expect much bigger capital gains in the future, such that you want to save the loss to be applied in a later year.

Typically, tax-loss selling would occur on stocks that have done horribly for the year. However, it’s important to decipher between real losers and ones that will make a strong comeback in the future.

Going against the grain

Pason Systems

It looks like tax-loss selling has already started on Pason Systems (TSX:PSI). The stock has slid 27% since mid-September. As a leader in the oil and gas services equipment industry, its stock can’t help but feel the pain when there’s a drop in drilling activity.

If anything, Pason’s financial metrics have held up quite well. Year to date, its revenue is up marginally to $227 million, its adjusted EBITDA fell 4% to $103 million, its funds flow from operations per share declined 8% to $1.04, its free cash flow fell 4% to $66 million, and its earnings per share increased by 3% to $0.51, thanks partly to a lower share count.

Its third-quarter results must have caused the sell-off. As oil and gas producers cut back on spending, Pason’s revenue fell 12%, adjusted EBITDA declined 26%, funds flow from operations per share fell 17%, and earnings per share fell 36%.

Despite contracting margins, however, Pason still maintains the highest margin among its peers. Its Q3 adjusted EBITDA margin was 43.7%. Should drilling activities pick up at the rigs, Pason’s business performance will improve dramatically.

In the meantime, PSI stock trades at a deep discount and offers a juicy yield of 6% — thanks partly to its increasing its quarterly dividend by 5.6% in September.

Pason has a fabulous track record for having maintained or increased its dividend every year since 2003. Its strong balance sheet and cash flow generation should help keep the dividend safe.

Whitecap Resources

If drilling activities were to pick up at the rigs, it’d mean energy prices have improved, and it’ll have a more direct impact on oil and gas producers like Whitecap Resources (TSX:WCP) before oil and gas services equipment companies like Pason Systems.

WCP stock is also subject to tax-loss harvesting, as it hasn’t done much this year — or so it seems. The stock hasn’t really gone anywhere, but it has paid a very generous dividend. In fact, Whitecap increased the monthly dividend by 5.6% back in May.

As of writing, the stock offers a succulent yield of 8.3%. The company finds itself too cheap to ignore! Therefore, it has begun buying back shares at a deep discount to its intrinsic value, and it’s cutting back on capital spending to do it. It makes sense when there’s congestion at the pipelines. Most analysts agree that the stock is worth close to 60% higher.

Management anticipates an improved payout ratio of 76% and a lower net-debt-to-funds-flow ratio of 1.5 times next year. So, Whitecap’s big dividend is secure.

Still, the sentiment around oil and gas stocks is so negative that investors may sell WCP stock to further push the already ridiculously cheap stock even lower.

Investor takeaway

Tax-loss harvesting for this year is valid through December 27. So, be prepared for more downside action in these stocks and other losers.

However, the stocks are so cheap now that bargain hunters should give them a closer look. While you wait for price appreciation, you can collect safe yields of 6-8%!

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 Kay Ng owns shares of Pason Systems and WHITECAP RESOURCES INC. The Motley Fool owns shares of and recommends Pason Systems.Pason Systems is a recommendation of Stock Advisor Canada.

More on Dividend Stocks

Engineers walk through a facility.
Dividend Stocks

1 TSX Stock I Wouldn’t Touch With a 10-Foot Pole

AtkinsRéalis (TSX:ATRL) is one TSX stock I'd never invest in.

Read more »

edit Woman in skates works on laptop
Dividend Stocks

3 No-Brainer Stocks to Buy Under $30

These three stocks all offer a huge deal for investors looking for dividends, as well as growth that will last.

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

Payday ringed on a calendar
Dividend Stocks

3 Dividend Stocks That Pay Me More Than $54.57 Per Month

These three dividend stocks have done me well over the years, so let's look at how much I've gotten in…

Read more »