Canadian value investors can generate a second stream of passive income in their TFSA (Tax-Free Savings Account) by purchasing cheap dividend stocks. As these dividend stocks are undervalued, you can also benefit from share price appreciation over time. Moreover, both dividend income and capital gains will be exempt from Canada Revenue Agency taxes, as all TFSA returns are tax-sheltered.
So, here are two cheap but excellent TSX dividend stocks you can buy and hold in a TFSA.
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Supremex stock
A small-cap undervalued gem, Supremex (TSX: SXP), manufactures and sells paper packaging, envelopes, and specialty products to enterprises. The first quarter (Q1) had a trailing 12-month sales of $298 million and a current run rate of annual sales of $350 million.
Supremex is a leading manufacturer of paper-based packaging solutions for e-tailers, direct mailers, and several other solution providers. With more than 6,000 customers, 17 manufacturing facilities, and two distribution centers, Supremex has increased sales from $192 million in 2019.
Its net earnings have widened from just $7 million in 2019 to $32 million in the last four quarters, indicating a margin of over 11%.
A rapidly expanding e-commerce activity will act as a major tailwind for Supremex, which is on track to increase revenue by 26.5% to $345 million in 2023.
Priced at 0.43 times forward sales and 4.9 times forward earnings, SXP stock is very cheap. It also offers shareholders annual dividends of $0.14 per share, translating to a tasty yield of 2.5%. Right now, Supremex stock is trading at a discount of 84% to consensus price target estimates.
Martinrea International stock
A company that designs, develops, and manufactures lightweight structures and propulsion systems, Martinrea International (TSX: MRE) is part of the automotive sector.
Despite a sluggish macro-environment, Martinrea International grew sales by 13% year over year to $1.30 billion in Q1. It reported an operating margin of 5.8%, as semiconductor and supply chain shortages normalized.
However, Martinrea continued to face headwinds such as instability in vehicle production volumes, production disruptions, and unplanned downtimes. It now expects to benefit from expanding margins and cash flows, as these issues are likely to dissipate by the end of 2023.
Martinrea stated it has been awarded $70 million in new business from auto giants such as Tesla and General Motors. Since the start of 2022, it has been awarded around $250 million in new business in addition to another $250 million in replacement business.
Martinrea expects to generate a positive free cash flow in the upcoming quarters due to lower capex and improving leverage ratios. The company’s adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) also hit a quarterly record in Q1, showcasing the resiliency of Martinrea’s business model.
It now expects to end 2023 with revenue between $4.8 billion and $5 billion and free cash flow between $150 million and $200 million. So, the TSX stock is priced at 0.2 times forward sales and just 5.6 times free cash flow, which is really cheap. It currently pays investors an annual dividend of $0.20 per share, indicating a yield of 1.7%.
Given consensus price target estimates, Martinrea stock is priced at a discount of 50% right now.
