After keeping the policy interest rate flat in March and April, this month, the Bank of Canada raised the rate by another 0.25% to 4.75%. Higher interest rates are one factor that has pressured stock valuations, driving higher dividend yields in solid stocks.
It will only be a matter of time before the central bank reduces interest rates (such as during a recession). Some pundits anticipate rates to increase in 2024/25, which would drive stock valuations higher then. It’s a once-in-a-decade chance to get rich from income stocks! You can wait for price appreciation while collecting nice dividend income.
Brookfield Renewable Partners
Brookfield Renewable Partners (TSX: BEP.UN) just dipped approximately 7% from its recent quotation of US$32 per unit primarily due to an equity offering that will equate to gross proceeds of roughly US$650-725 million. Specifically, the equity offering was predominately done over a bought deal basis across the Big Five Canadian banks, including Toronto-Dominion Bank (TSX: TD), at US$30.35 per unit for NYSE:BEP and US$33.80 per share for NYSE:BEPC. This indicates the banks are confident about the business and their ability to resell those shares to their customers.
Currently, investors can get the shares at a discount of about 2.2% on the stock market versus the equity offering level, which is not a bad deal, given that the BEP units provide a decent cash-distribution yield of over 4.5%.
Furthermore, the renewable power and decarbonization solutions company offers good growth as well. Through a combination of its global scale, operating and development expertise, and value investing approach, the top utility stock targets returns of 12-15% for its unitholders, which includes annual cash-distribution growth of 5% or greater.
At US$29.68 per unit at writing, the 12-month analyst consensus price target suggests the undervalued stock trades at a good discount of close to 22%.
TD Bank
Toronto-Dominion Bank stock is a core holding in diversified portfolios. On BNN Bloomberg Market Call this month, the discounted bank stock was just recommended as a top pick by three separate experts and as a “buy” by three more. Some common points they like about the bank is that TD has excess capital from the canceled acquisition of First Horizon and of course the fact that the stock is discounted and offers an attractive dividend yield of close to 4.8%.
You see, normally, it would be a good buy to capture a dividend yield of north of 4% from TD stock. The higher yield is an indication that it could be undervalued. Furthermore, it trades at about 1.4 times its book value whereas during good times, it can trade at north of 1.8 times book. At $80.58 per share at writing, it also trades at about 9.6 times its blended earnings. So, optimistic investors with a long-term view will find that the stock trades at a discount of more or less 20%.
Investor takeaway
Canadian investors can get the icing and eat the cake, too — stock up on quality dividend stocks like BEP and TD when they’re cheap to start collecting juicy dividend income. And price appreciation will eventually follow.
