The market downturn that has occurred over the past year in several TSX sectors is giving investors who missed the bounce after the 2020 crash a new opportunity to buy great Canadian dividend stocks at undervalued prices. It takes nerve to put money to work when the trend is to sell, but buying top stocks on big dips can boost total returns for patient investors.
Fortis
Fortis (TSX:FTS) is a utility company with $64 billion in assets located across Canada, the United States, and the Caribbean. The businesses include power-generation facilities, electric transmission networks, and natural gas distribution utilities.
A full 99% of revenue comes from rate-regulated assets. This is good news for investors who want to own stocks of companies with reliable cash flow to support distributions. Fortis grows through investments in development projects and acquisitions. The current $22.3 billion capital program is expected to boost the rate base by about 35% over five years. This should drive enough cash flow growth to support planned annual dividend increases of 4% to 6% through 2027. That’s good guidance in the current economic environment.
Fortis stock trades near $52 at the time of writing compared to $61 in May.
The decline looks exaggerated, given the solid financial outlook. Investors who buy FTS stock at the current level can get a 4.5% dividend yield. The board increased the payout in each of the past 49 years.
CIBC
CIBC (TSX:CM) increased its dividend earlier this year. The bank continues to be very profitable in these challenging marketing conditions, and the stock price appears priced for a financial crisis, which isn’t currently the anticipated outlook among most economists.
CIBC isn’t without risk. High interest rates are putting pressure on businesses and households that have taken on too much debt. The longer that rates remain elevated, the more likely it is that unemployment could spike and loan defaults could surge, driving the economy into a nasty downturn. CIBC has a high exposure to the Canadian residential housing market relative to its size. A meltdown in house prices caused by a wave of defaults would potentially hit CIBC harder than its larger peers.
For the moment, the housing market remains resilient, despite the steep increase in interest rates. Economists are starting to predict rate cuts next year as the economy slows down. In a soft landing situation, CIBC stock currently looks oversold.
The bank has a good capital cushion to ride out a downturn if things get ugly, so the dividend should be safe.
CIBC trades near $52 per share at the time of writing compared to $82 in early 2022. Investors can now get a 6.7% dividend yield.
Enbridge
Enbridge (TSX:ENB) is making moves to diversify its revenue stream. The oil pipelines giant recently announced a deal to acquire three natural gas utilities in the United States for US$14 billion. This follows the purchase of the third-largest American renewable energy developer last year and the acquisition of an oil export terminal in Texas for US$3 billion in 2021. Enbridge is also a partner on the Woodfibre liquified natural gas (LNG) export project being built on the coast of British Columbia.
The new utility assets and the current $17 billion capital program should drive steady cash flow growth in the coming years. Enbridge has raised its dividend annually for nearly three decades. At the current share price, the stock offers a 7.8% dividend yield.
The bottom line on cheap dividend stocks
Additional downside is certainly possible, but Fortis, CIBC, and Enbridge already look cheap and deserve to be on your radar for a buy-and-hold portfolio focused on dividend income and total returns.
