Income Stocks: Here’s a Dividend Diamond in the Rough Yielding Over 6.7%

TC Energy (TSX:TRP) stock is a pipeline firm that’s a dividend diamond in the rough.

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As broader markets digest the latest round of earnings, Canadian investors would be wise to stick with cheap, old-fashioned dividend stocks, especially in the names with yields on the high end of the range. Indeed, chasing yield without putting in the proper amount of due diligence is almost always a recipe for trouble.

When it comes to dividend stocks with yields at or around the historically high level, there’s usually some selling pressure that’s weighed a stock down. It’s your job as a self-guided investor to determine whether the pressure is overdone, underdone, or about right.

Indeed, it’s tough to find dividend stocks with swollen yields that don’t have some sort of baggage. If there isn’t much baggage and the valuation (and yield) compensate for risks brought forth by such baggage, it may be time to consider averaging down into a name.

A 2023 recession doesn’t mean only pain and zero gain

2023 may see a recession. But it doesn’t have to be a disastrous scenario like the events that unfolded in February and March of 2020. A recession that’s on our radar is likely to be less disruptive than one that catches us off guard or from out of nowhere.

We’ve been hearing about rate-induced recession risks for more than a year now. Eventually, the recession will settle in, and the main question will be how the earnings of individual companies fare as headwinds peak. I think they’ll fare pretty well given the low estimates in place.

I think there’s a good chance that the calm before the storm is more anxiety inducing for new investors. The latest round of U.S. tech earnings (tech has been the epicentre of market volatility in recent quarters) has been pretty good. They’re not done yet, but early signs suggest negativity is unwarranted.

In any case, I’d continue to stick by tried-and-true dividend stocks with reliable payouts. TC Energy (TSX:TRP) is one such name that I think is trading at an enviable multiple after its latest pullback.

TC Energy: A 6.7% dividend yield at a modest price

TC Energy’s Keystone pipeline spill and other negative headlines have likely weighed heavily on investor sentiment of late. As shares attempt to recover off multi-year lows, I like the risk/reward scenarios for long-term investors seeking big passive income and growth over time.

The stock trades at just 1.8 times price to book and 12.8 times forward price to earnings. After a rough past year of trading, investors may be discounting the firm’s longer-term prospects. The firm was touted by Raymond James for having a “best-in-class asset base” that will help it “drive EBITDA [earnings before interest, taxes, depreciation, and amortization], earnings, and dividend growth.”

That’s quite an upbeat call!

While there will be headwinds weighing over the nearer term, I think Raymond James is right on the money with its bullish TC Energy call. At the end of the day, it has the cash flow-generative assets to back itself up.

The bottom line for dividend investors

Down more than 27% from its all-time high, I view TC Energy stock as a very compelling contrarian play for investors seeking greater exposure to the midstream energy space.

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 Joey Frenette 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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