The TSX Index has been on a rampage since the start of 2021. Yet there are still some great undervalued dividend stocks available. Of course, there have been concerns about the rising 10-year U.S. bond yield. The market is certainly skittish that inflation and interest rates could rise to extreme levels. Consequently, many commentators have been particularly concerned about TSX dividend stocks, especially those referred to as “bond proxies.” I am not concerned.
I’m not worried too much about the rising bond yield
Considering the state of the world and the economy, it is unlikely (although possible) that interest rates shoot beyond their five-year average. Interest rates are still near all-time lows, so a slight rise would just recognize a more normal (and healthy) economic environment. Top BMO strategist Brian Belski believes rising rates will actually be supportive for stocks. He believes the market remains incredibly short-sighted. Generally, if rates rise, so too should stocks, as they are both indicators of a healthy economy.
Great Canadian dividend stocks should benefit from the economic recovery too
The great thing about Canadian dividend stocks is that they generally benefit from healthy economic trends, just like the rest of the market. During the pandemic, many dividend stocks have focused on cost reductions, lower debt, and operational efficiencies.
Consequently, as the economy recovers, many of them will be primed for strong cash flow returns and potentially dividend growth. Today, you can get a 1.4% interest yield from the U.S. 10-year bond, or you can get a +5% dividend yield plus capital upside from a quality Canadian dividend stock. I don’t know about you, but I know where I would rather put my money today.
This unloved Canadian dividend stock is a bargain
Given this, one great TSX dividend stock that is a bargain today is Pembina Pipeline (TSX:PPL)(NYSE:PBA). Undoubtedly, 2020 was hard on this business. It was affected by a decline in pipeline volumes. Pembina was also hit by unfavourable commodity pricing on its midstream business segments. Consequently, the company pulled back its capex spending, buried a couple of large growth projects, and took some painful $1.6 billion impairment writedowns.
Yet I believe management is making prudent spending choices to protect its dividend and its balance sheet. Regardless of the pandemic, this dividend stock still achieved its pre-pandemic adjusted EBITDA guidance. It still earned $3.28 billion of adjusted EBITDA for the year. Generally, this company has a very stable operating platform with 94% of adjusted EBITDA coming from fee-based contracts (72% are take or pay).
Overall, this is a great Canadian dividend stock to hold in an economic recovery. With WTI oil prices hitting over US$60, the fundamentals for the energy sector cautiously look attractive. Pembina has a number of low-cost internal levers it can pull should pricing support even stronger volumes. Likewise, it still has a $4 billion capital project pipeline (secured and unsecured) it can pursue for growth should sector fundamentals support.
Pembina pays an attractive 7.8% dividend. Yet dividends remain well covered by cash flows (a 61% adjusted cash flow payout ratio). This stock is cheap today and trades with a 2021 EV/EBITDA of only 10 times. That compares to most peers trading between 12 and 15 times. Considering its valuation, stable cash flow mix, and opportunity for upside, Pembina remains one of my top cheap, underfollowed Canadian dividend stocks to buy today!
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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 Robin Brown owns shares of PEMBINA PIPELINE CORPORATION. The Motley Fool recommends PEMBINA PIPELINE CORPORATION.