The TSX Index is near record highs to start 2020, making it difficult for investors to find good value when picking new stocks for their self-directed RRSP portfolios.
The RRSP is normally treated as a buy-and-hold fund and that often makes dividend stocks attractive picks. Investors can use the dividends to acquire new shares, setting off a powerful snowball effect that harnesses the power of compounding. With a 20- to 30-year investing horizon, Canadians can build substantial retirement holdings.
Let’s take a look at two quality dividend stocks that appear cheap as we begin 2020.
Suncor
Suncor Energy (TSX: SU)(NYSE: SU) is Canada’s largest integrated energy company with assets that span the full spectrum of the value chain.
Suncor is best known for its large oil sands and offshore oil production facilities. The oil sands operations have vast resources with decades of potential production capacity. The offshore oil assets are growing and provide Suncor with easy access to global prices, which are higher than the Western Canadian Select price that many Canadian producers have to accept.
Suncor’s four refineries take advantage of low input costs when oil prices drop and can generate large profits on the sale of the end products, depending on market conditions. Suncor produces gasoline, diesel fuel, jet fuel, and asphalt.
In addition, the company operates about 1,500 Petro-Canada retail locations.
Suncor gets the better WTI or Brent pricing for most of its production due to favourable market access. Since early October, WTI is up from US$53 to US$62 per barrel, and Brent has increased from US$58 to $68. This means Q4 revenue and cash flow results should be robust, and investors might get a nice dividend increase for 2020.
Suncor raised the payout by nearly 17% in 2019 and has hiked the dividend for 17 straight years.
At $43 per share, the stock appears cheap. It wouldn’t be a surprise to see Suncor’s share price top $50 in 2020 on further strengthening in oil prices. Investors who buy today can pick up a 3.9% yield.
CIBC
Canadian Imperial Bank of Commerce (TSX: CM)(NYSE: CM) is Canada’s fifth-largest bank by market capitalization and is often cited as the one with the most risk for investors.
It is true that CIBC has a history of making big blunders, and its heavy exposure to the Canadian housing market puts it at risk of large losses in the event house prices plunge.
A drop in mortgage rates over the past year and a halt on interest rate hikes at the Bank of Canada have diffused some of the housing risk, but an economic downturn that drives up unemployment could still cause trouble in the housing market, even with loan rates at such low levels.
That said, CIBC is well capitalized, and acquisitions in the United States in the past two years have increased the revenue coming from that market. The American operations now account for roughly 17% of net income, and that could increase on new deals in the coming years.
CIBC remains very profitable and the dividend should be safe. The current payout provides a yield of 5.3%.
At just 9.7 times trailing 12-month earnings, the stock appears somewhat oversold. CIBC’s larger peers fetch multiples of 11-12 times earnings.
The bottom line
Suncor and CIBC are top-quality companies that pay attractive dividends and currently trade at reasonable prices.
If you are searching for new RRSP investments for 2020, these stocks deserve to be on your radar.
