2 Unjustifiably Cheap Dividend Stocks in Canada

Given their cheaper valuation and high dividend yields, these two Canadian stocks are an excellent buy for income-seeking investors.

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With inflation in the United States coming in line with expectations and the easing fears of contagion in the banking sector amid the failure of two banks, the S&P/TSX Composite Index rose 0.5% yesterday. Despite the increase, the benchmark index is trading 5.5% lower than this year’s highs.

Amid the weakness in the broader equity markets and rising interest rates, the following two Canadian dividend stocks have witnessed substantial selling over the last few months. Meanwhile, the steep correction has provided a buying opportunity for income-seeking investors in these two stocks.

TC Energy

TC Energy (TSX:TRP) is an energy infrastructure company that operates a network of pipelines, storage facilities, and power-producing plants. In December, the company reported an oil spillage of 14,000 barrels from its Keystone pipeline in Kansas. On the back of the spillage, the United States authorities have ordered the company to lower its operating pressure on the entire Keystone pipeline.

The announcement and weakness in the broader equity markets have dragged TC Energy’s stock price down, which currently trades 27% lower compared to its 52-week high. Amid the steep correction, the company’s price-to-book multiple stands at 1.8.

Notably, the company operates a highly regulated business, with around 95% of its adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) underpinned by rate-regulated assets and long-term contracts. So, the company’s financials are less susceptible to market volatility. These stable financials have allowed TRP to raise its dividends for the previous 23 years at a CAGR (compounded annual growth rate) of 7%. The stock’s yield for the next 12 months stands at 6.87%.

The growing LNG (liquified natural gas) exports from North America to Europe are driving the demand for TC Energy’s services. Meanwhile, the company is continuing its $34 billion secured capital program, expanding its asset base. These growth initiatives could grow its adjusted EBITDA at a CAGR of 6% through 2026. So, given its solid underlying business, strong balance sheet, and healthy growth prospects, the company’s future payouts are safe, making it an ideal buy for income-seeking investors.

TransAlta Renewables

TransAlta Renewables (TSX:RNW) operates highly contracted renewable and natural gas power generation facilities in Canada, the United States, and Australia. It operates 50 power-producing facilities, with an overall capacity of 2,993 megawatts. Amid the rising interest rates and weakness in the renewable space, the company has been under pressure over the last few months. It has lost around 39% of its stock price compared to its 52-week high. The sell-off has dragged its valuation down to attractive levels, with its NTM (next 12 months) price-to-earnings multiple declining to 14.5.

TransAlta Renewables has put in place long-term agreements to sell a substantial percentage of the power produced by its facilities. These long-term agreements shield its financials from price and volume fluctuations, thus delivering stable financials. Supported by these strong financials, the company has been paying dividends at a healthier rate. RNW currently pays a monthly dividend of $0.07833, with its yield at 7.87%.

This year, TransAlta Renewables expects to put new renewable and transmission assets in Australia into service. Also, it hopes to bring its Kent Hills facilities back into service in the second half of this year. These growth initiatives could boost its financials, thus allowing the company to continue paying dividends at a healthier rate. 

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 Rajiv Nanjapla has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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