Is This Stock a Slam Dunk Buy for Dividend Investors?

This impressive Canadian dividend stock continues to perform well in this economic environment, making it one of the best to buy now.

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Dividend investors typically prioritize passive income, so naturally, many tend to focus on the yield of the stocks that they’re looking to buy. However, some of the best dividend stocks are ones that offer consistent dividend growth alongside an attractive yield.

Dividend stocks are some of the most popular investments because they offer both regular income as well as the potential for capital appreciation.

And because they constantly return a portion of their profits to investors rather than reinvesting all that cash into growth, they have become increasingly popular among Canadians seeking to balance their portfolios and minimize risk.

However, the economy is on the brink of a potential recession this year and several macroeconomic headwinds are impacting companies across many industries. Needless to say, it’s essential to ensure that the stocks you buy are high-quality and have the ability to weather the storm.

That’s why Canadian Tire (TSX:CTC.A) looks like a no-brainer buy for dividend investors, especially while it trades so cheaply.

So if you’re a dividend investor looking for a top stock to buy now, here’s why Canadian Tire looks like a top choice today.

This dividend growth stock continues to perform well

Canadian Tire has long been one of the best-known brands in Canada and a favourite shopping destination for many consumers. Plus, over the last decade, it has made a number of acquisitions to expand its footprint and help scale costs. These buys have all helped Canadian Tire to continue growing and performing well.

Perhaps the best evidence we have of Canadian Tire’s impressive performance, though, is its endurance through the pandemic. During this time, many retail companies were being impacted.

Its massive slate of product offerings, along with its thriving e-commerce operations, helped Canadian Tire to not only weather the storm but actually grow its sales. For example, in 2020, its sales rose by over 2% and in 2021 and 2022, its revenue growth was over 9% each year. This performance shows why it’s one of the best dividend stocks to buy and hold long term.

Therefore, although many expect a recession to materialize this year, Canadian Tire is once again exceeding analyst expectations. In its most recent earnings report, the Canadian retailer reported normalized earnings per share (EPS) of $9.34, considerably exceeding expectations of $7.46.

That’s a positive sign for investors, especially dividend investors, as Canadian Tire’s growth in profitability directly impacts the growth of its dividend.

Since 2018, Canadian Tire’s dividend has risen from $3.60 to $6.90, an increase of 92% in only five years for the retail stock. Furthermore, it offers a current dividend yield of more than 4% today. Yet, its dividend also has a payout ratio of just 37%, according to its 2022 normalized EPS of $18.75.

Canadian Tire also trades undervalued today

In addition to this passive income, dividend investors have other reasons to consider Canadian Tire stock today. CTC has the potential for continued dividend increases going forward. What’s more, it is trading well off its highs.

Right now, with the stock around $170 a share, it has a low forward price-to-earnings (P/E) ratio of 9.6 times. That’s already quite low, but it’s also well off its five-year average of more than 11.2 times earnings, showing the value it offers today.

It’s also worth noting that the eight analysts covering Canadian Tire unanimously rated it a buy. It has an average target price of around $203, a roughly 20% premium from where it trades today.

So if you’re looking for a reliable dividend stock with plenty of growth potential that you can buy while it’s undervalued, Canadian Tire is one of the best to consider today.

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 Daniel Da Costa 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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