Interest rates have risen, and many dividend stocks have dropped in 2023. Why? Firstly, many stocks that pay higher dividends also have high capital expenses that require a lot of debt. Debt expenses go up, and that can affect future profitability.
Secondly, as interest rates rise, low- to no-risk investments like GICs (Guaranteed Investment Certificates) and government bonds become more attractive to income investors. These investments have very limited risk compared to stocks. Consequently, investor demand moves from higher-risk stocks to lower-risk income-producing assets.
While this is a near-term headwind for dividend stocks, it can also create long-term opportunities. Many dividend stocks are trading with multi-year high dividend yields. If you don’t mind the above risks, there can be some long-term bargains. Here are three Canadian dividend stocks that look pretty cheap right now.
TELUS: A big dividend but some risks to watch
TELUS (TSX:T) trades with a 6.1% dividend yield today. That is the highest dividend yield that TELUS stock has had in over 10 years. The stock is down 12% in 2023. A lot of that decline has to do with the reasons above.
TELUS has been spending heavily on its fibre and wireless infrastructure. As a result, it has added a lot of debt to its balance sheet. Rising interest expense is putting pressure on profitability.
However, after its second quarter, the company laid off 6,000 staff and implemented new efficiency measures. Likewise, it continues to see a robust amount of excess cash coming its way as it completes its large infrastructure build-out.
On a projected cash flow basis, TELUS stock is the cheapest it has been in almost 10 years. Certainly, there are risks to be concerned about. However, if you trust management can do what it says, the dividend should be sustainable, and mid- to high single-digit dividend growth will continue in the coming years.
Whitecap Resources: A cheap energy stock with a big dividend
Energy stocks continue to be an attractive place for value and income. A good player in this space is Whitecap Resources (TSX:WCP). With a market cap of $7 billion, Whitecap is one of the larger mid-cap energy players in Canada.
Whitecap currently pays a 5% dividend yield. It happens to pay its dividend monthly. Just last week, the company raised its dividend by 26%. Since the start of 2021, it has increased its monthly dividend six times.
Whitecap trades with a price-to-earnings ratio (P/E) of only 6.5 times. The company has great resources, strong reserves, and an invested management team. Despite rising 16% this year, this dividend stock is still cheap, especially if oil prices continue to rally.
Dream Industrial REIT: High-quality assets at a great price
Real estate has taken a beating over the past two years. However, not all real estate has been performing poorly. For example, Dream Industrial REIT (TSX:DIR.UN) grew funds from operation (FFO) per unit (a core metric of cash flows for real estate) by 14% last quarter. Rental spreads on new leases and renewals were up 47% in the quarter.
Dream’s multi-tenanted properties are in some of Canada’s largest growth cities. Demand for its properties has been incredibly resilient. With FFO/unit rising by the high-single digits over the past few years, Dream’s distribution payout ratio has dropped to 71%.
This stock earns a 5% distribution yield. You can buy Dream stock at an 18% discount to its private market value, so it still looks like an attractive buy today.
