Thanks to the central bank raising the policy interest rate last year, stock valuations have come off. Consequently, income stocks now offer some of the biggest dividend yields in a decade. As some economists predict, Canada and the United States could enter a mild recession later this year. So, business growth could be slow, stagnant, or even contract. Therefore, it’s probably worthwhile for Canadians to hold a good portion of their portfolios in income stocks.
Currently, Canadians can get dividend yields of 6-7% from the following dividend stocks. Remember that eligible dividends are taxed at lower rates than your job’s income or interest income. From dividend income alone, investors can get close to the long-term Canadian stock market returns of about 7-8% per year.
Investing $100,000 for a 6-7% dividend yield equates to $6,000-$7,000 of passive income a year. It follows that $200,000 would make $12,000-$14,000 in annual dividend income, and $300,000 would make $18,000-$21,000.
Without further ado, here are three high-yield stocks you can look more closely into.
Enbridge stock
The large energy infrastructure stock Enbridge (TSX:ENB) is well known for its generous dividends. It dipped this week. At $50 per share at writing, it offers an amazing dividend yield of 7.1%. Analysts believe it trades at a discount of approximately 15% with 12-month upside potential of 17%. So, its 12-month total-return potential is about 24%, which is top notch for a blue-chip stock.
The Canadian Dividend Aristocrat has increased its dividend for 27 consecutive years. Its recent dividend increases have been roughly 3%. In the first quarter, the company’s adjusted earnings before interest, taxes, depreciation, and amortization, a cash flow proxy, climbed 7.7% to $4,468 million, adjusted earnings increased by 1% to $1,726 million, and distributable cash flow (DCF) rose 4%. Importantly, there was no dilution in the common stock year over year. So, it looks like it’s setting up for more dividend growth that will more or less align with its DCF growth.
BCE stock
Another income stock favourite is BCE (TSX:BCE), which offers a juicy dividend yield of 6.1% right now. As one of the Big Three Canadian telecoms, it generates substantial cash flow every quarter. The Canadian Dividend Aristocrat has increased its dividend for 14 consecutive years with a very consistent dividend-growth rate of just north of 5% in the periods of one, three, five, and 10 years.
The telecom has been quite capital intensive. In the past three years, it used about two-thirds of its operating cash flow in capital spending. It’s estimated that by 2024, the capital program will tune down, and, therefore, BCE will generate more free cash flow for healthy dividend growth.
At $63.15 per share at writing, analysts believe the stock is fairly valued. Interested investors should aim to buy at most around $58 per share over the next 12 months.
Bank of Nova Scotia stock
Income investors are also fans of big Canadian banks. Right now, among the Big Six Canadian bank stocks, Bank of Nova Scotia (TSX:BNS) offers the highest yield of 6.15%. Investors may be worried about an upcoming recessionary environment. As well, the international bank has exposure to higher-risk but potentially higher growth geographies, such as Mexico, Peru, and Chile.
Due to higher provision of credit losses expected from a higher percentage of bad loans in a recessionary scenario, the bank’s payout ratio is anticipated to be higher than normal this year. Currently, it’s estimated to be about 55%, which is still sustainable. The stock also trades at a meaningful discount of roughly 26% from its long-term normal valuation.
Investor takeaway
Pushed down stock valuations leading to higher dividend yields makes dividend stocks a better investment to combat inflation. Canadians should explore a basket of solid dividend stocks as a part of their diversified portfolios.
