Quality dividend stocks trading at a discount offer shareholders the opportunity to benefit from a high yield as well as long-term capital gains.
The global economy remains sluggish due to the triple whammy of interest rate hikes, inflation, and geo-political tensions, driving down valuations of stocks across multiple sectors. The time is ripe to identify fundamentally strong Canadian dividend stocks and hold them in your equity portfolio today.
Here are two such income stocks that have performed well across market cycles.
Enbridge stock
Down 23% from all-time highs, Enbridge (TSX:ENB) offers shareholders a tasty dividend yield of 7.8%. Enbridge stock moved lower last week after the company announced its intention to acquire three natural gas utilities from Dominion Energy.
In the last few years, Enbridge has looked to diversify its revenue streams and invested heavily in natural gas assets, reducing its dependency on oil.
Around 75% of Enbridge’s EBITDA (earnings before interest, tax, depreciation, and amortization) were derived from oil pipelines in 2016, which has reduced to less than 60% in 2023. In this period, EBITDA from natural gas pipelines and natural gas utilities almost doubled from 21% to 40%.
The deal, which is valued at $14 billion, will make Enbridge the largest natural gas provider in North America. Its natural gas business will then account for 47% of total EBITDA.
Once it realizes cost synergies, Enbridge will be able to increase cash flows and dividends in the upcoming decade. A regulated and widening utility business will also enable Enbridge to enjoy stable cash flows amid economic downturns, making it a top dividend investment right now.
Enbridge has already increased dividends by 10% annually in the last 28 years, showcasing the resiliency of its cash flows. Priced at 16 times forward earnings, Enbridge stock trades at a discount of 22% to consensus price target estimates. After adjusting for dividends, total returns will be closer to 30% in the next 12 months.
Bank of Nova Scotia stock
Another TSX giant, Bank of Nova Scotia (TSX:BNS) offers shareholders a juicy dividend yield of 6.7%. Despite the cyclical nature of the banking sector, BNS has raised dividends by 8.7% annually in the last 22 years. In fact, BNS started paying shareholders a dividend in 1833 and has maintained its payout for 190 years.
Unlike the U.S., the Canadian banking system is quite conservative and highly regulated, which has limited competition for BNS and its peers. Several banks south of the border were forced to cut dividends during the financial crisis in 2008. However, each of the large Canadian banks could maintain dividends during this volatile period due to their robust liquidity position.
The Canadian banking giant is also looking to gain traction in emerging markets in Latin America, which should fuel its earnings growth and diversify its cash flows.
Priced at nine times forward earnings, BNS stock is quite cheap, given its earnings growth forecast.
The Foolish takeaway
Both Enbridge and BNS have survived multiple recessions, making them ideal bets for income investors in 2023. The two stocks trade at an attractive valuation and offer upside potential for shareholders.
