Canadian retirees can consider purchasing cheap TSX dividend stocks in their TFSA (Tax-Free Savings Account) right now. Buying undervalued dividend stocks can help you earn a steady stream of passive income and benefit from capital gains, as the markets continue to recover in the next 12 months.
Both capital gains and dividends earned in a TFSA are exempt from Canada Revenue Agency taxes, making dividend stocks such as Canadian Western Bank (TSX: CWB) and Magna International (TSX: MG) top investments today. Let’s see why.
Canadian Western Bank stock
Down 33% from all-time highs, Canadian Western Bank offers shareholders a tasty dividend yield of 4.5%. The company provides services such as personal banking, specialized financing, wealth management, and trust services.
In the fiscal third quarter (Q3) of 2023 (ended in July), CWB reported net income of $83 million and adjusted earnings of $0.88 per share. Its earnings were up 19% sequentially due to higher net interest margins, a focus on expense management, and a higher number of interest-earning days.
CWB continues to target lending opportunities that generate strong returns with a prudent risk appetite for the current macro environment, which is uncertain and sluggish. Its secured lending model, robust underwriting practices, and loan management have supported provisions for credit losses that are below the lower end of its historical range.
It is a disciplined lender that delivers strong growth with low credit losses across market cycles. The company has diversified its revenue base in the last few years by expanding its investment management division. Non-interest income now accounts for 11% of total earnings, compared to less than 9% in 2020.
Priced at 8.5 times forward earnings, CWB stock is very cheap, given its high dividend yield and earnings improvement. Despite the cyclicality associated with the banking sector, CWB has increased dividends by 11.5% annually in the last 18 years, which is quite exceptional.
Magna International stock
An auto ancillary stock, Magna International has returned 140% to shareholders in the last decade after adjusting for dividends. Down 36% from all-time highs, Magna International stock also offers shareholders a dividend yield of 3.1%.
Magna International operates 351 manufacturing facilities and is among the largest suppliers of automobile parts. An original equipment manufacturer, Magna International supplies parts to electric vehicle companies, including Lucid, Nio, and Rivian.
Magna International is well-positioned to benefit from the electric vehicle (EV) boom in the upcoming decade. Last October, the company disclosed plans to invest $500 million to build two new manufacturing facilities in Michigan and to expand an existing plant.
Despite an inflationary macro environment, Magna International increased sales by 17% to $11 billion while adjusted earnings per share were up 81% at $1.50 in Q2. Priced at 11 times forward earnings, Magna International is forecast to increase adjusted earnings by 37% annually in the next five years.
This solid expansion in profit margins should also boost dividend payouts higher. In the last 18 years, the mid-cap stock has raised dividends by 9.5% annually.
Due to its compelling valuation, Magna International stock trades at a discount of 20% to consensus price target estimates.
