Canadian Value Investors: 2 Ridiculously Cheap Stocks

Cheap dividend stocks can be lucrative investments if you buy and sell strategically. They can also pay nice dividend income in the meantime.

| More on:
Value for money

Image source: Getty Images

In today’s high inflation, rising interest rate environment, it’s insufficient for a stock to just be cheap. Canadian value investors would be better served to look for stocks that are both cheap and pay them well. Here are some ridiculously cheap dividend stocks you can explore.

Look for value in the energy sector

The energy sector has outperformed the market in the last one, three, and five years due to higher energy prices. The one-year total return shows a biased view in a favourable operating environment for the energy sector.

XEG Total Return Level Chart

XEG and XIU Total Return Level data by YCharts

The three-year total return is more telling, as it illustrates the volatility that investors must bear when investing in the energy sector.

XEG Total Return Level Chart

XEG and XIU Total Return Level data by >YCharts

And it was a close win for the energy sector over the last five years.

XEG Total Return Level Chart

XEG and XIU Total Return Level data by YCharts

Stan Wong, portfolio manager at Scotia Wealth Management, stated on BNN last week that “Energy has a major supply/demand imbalance, along with major under-investment over the years. So, pricing can remain pretty firm with demand steady.”

A cheap energy stock paying a good dividend

XEG Total Return Level Chart

XEG Total Return Level data by YCharts

Parex Resources (TSX:PXT) has underperformed the energy sector in the last one and three years, but it has outperformed in the last five and 10. This is because the oil stock generally remains under-leveraged versus its peers. In fact, its net debt is zero. And it tends to buy back shares. Because of relatively high oil prices with Parex particularly enjoying premium Brent oil prices, its profits have spiked. It now trades at about 4.1 times trailing earnings and 2.7 times forward earnings.

Moreover, it started paying a quarterly dividend in September, which should improve the stability of its returns and possibly boost total returns for investors. Its trailing 12-month (TTM) payout ratio was approximately 20% of free cash flow. Specifically, it had about $341 million free cash flow left over after capital investments and dividend payments!

Parex doubled its dividend year over year. Its dividend yield is just over 4.7% at $20.97 per share at writing.

One more energy-related dividend stock that’s ridiculously cheap

Another energy-related dividend stock that is mispriced is Canadian Western Bank (TSX:CWB). It trades at a lower multiple than its bigger bank peers. First, it is a smaller bank. Second, it has about 31% of its loans in Alberta. The province’s economy can be more unpredictable because of volatile energy prices.

The Canadian bank’s business has already significantly diversified away from Alberta over time. British Columbia and Ontario are where 33% and 24%, respectively, of its loan portfolio is. In the last reported quarter, it saw loan growth in all three provinces with its consolidated loan portfolio seeing growth of 9% year over year. Its gross impaired loans as a percentage of gross loans were fairly low at 0.53% fiscal year to date, down 33 basis points year over year.

The bank remains profitable through economic cycles and has maintained a respectable dividend-growth streak of 30 consecutive years through three recessions! At $24.79 per share, the bank stock trades at about 6.8 times earnings. Given the right environment, it can appreciate to its long-term normal valuation, which represents about 66% upside. Meanwhile, investors get paid well to wait. CWB stock offers a juicy yield of 5%. Its TTM payout ratio is sustainable at 39%.

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 has positions in Canadian Western Bank and Parex Resources. The Motley Fool has no position in any of the stocks mentioned.

More on Dividend Stocks

Businessmen teamwork brainstorming meeting.
Dividend Stocks

1 Magnificent Dividend Stock Down 15% to Buy and Hold Forever

Enbridge is off the 12-month lows but still trades at a large discount to its 2022 high.

Read more »

Increasing yield
Dividend Stocks

My Top 5 Ultra-High-Yield Dividend Stocks to Buy in May

If you’re looking to build a passive-income stream, these five dividend stocks should be on your radar.

Read more »

Payday ringed on a calendar
Dividend Stocks

A 10.6% Dividend Stock That Provides Monthly Cash Payments

A dividend stock with a mouth-watering yield providing monthly cash flow streams.

Read more »

Dividend Stocks

The Top Canadian REITs to Buy in May 2024

These three REITs have envious growth potential and trade cheaply today, making them three of the top Canadian stocks to…

Read more »

Young woman sat at laptop by a window
Retirement

Why I Can’t Stop Buying Shares of This Magnificent High-Yield Stock in My Retirement Account

This utility is an excellent retirement stock, providing juicy income, income growth, and wealth creation for the long haul!

Read more »

A close up image of Canadian $20 Dollar bills
Dividend Stocks

Passive Income: How Much to Invest to Earn $1,000 Each Year

If you want the right passive-income producer, you want historical performance and future growth, and this dividend stock provides exactly…

Read more »

Cogs turning against each other
Dividend Stocks

1 Magnificent TSX Dividend Stock Down 9% to Buy and Hold Forever

A high-yield TSX dividend stock is a buying opportunity for long-term investors.

Read more »

money cash dividends
Dividend Stocks

2 Under-$10 Dividend Stocks I’d Buy Right Now

Here's why low-cost dividend stocks such as Decisive Dividend should be part of your shopping list in 2024.

Read more »