I like shopping for value. So, when I see stocks that are out-of-favour with the market, I take a closer look. Here are a couple of stocks that appear to be low-hanging fruits that could deliver good returns for patient investors with a long-term investment horizon. Importantly, the stocks pay out decent dividend income, while investors wait for price appreciation.
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RioCan REIT
RioCan REIT (TSX: REI.UN) was in a downward trend last year. The retail real estate investment trust (REIT) seems to have finally bottomed around $16 per unit in October. It has now rebounded to $18.60 per unit at writing, which is still a decent area to pick up shares even just for income.
The Canadian REIT yields 5.8%, which is paid out in monthly cash distributions. This cash distribution has good coverage as its 2023 funds from operations payout ratio is estimated to be approximately 61%, which is low compared to its peers. Although it’s primarily in retail real estate, it maintains a high occupancy across its resilient portfolio.
The stock also trades at a discount multiple of roughly 10.5 times funds from operations. Coupled with potential valuation expansion and growth prospects from its project pipeline, it might surprise the investing community by delivering total returns of close to 12% per year over the next five years.
Capital Power
Capital Power (TSX: CPX) is a growth-oriented power producer in North America. Sure enough, it has delivered higher dividend growth versus its peers. For your reference, its five-year dividend growth rate is 6.7%. And its last dividend hike was 6% in August.
It has an operating capacity of about 7,700 MW across 30 facilities, using natural gas as the primary source of energy, followed by renewables (wind and solar). The adjusted EBITDA, a cash flow proxy, diversification is about 65% natural gas and 35% renewables.
In November, it announced the acquisition of two key gas assets, La Paloma in California and Harquahala in Arizona, which management expects to be immediately accretive with an average accretion of 8% from 2024 to 2028 for its adjusted funds from operations, on a per-unit basis. Specifically, Capital Power owns a 50% interest in Harquahala – the other 50% is owned by BlackRock Infrastructure. Capital Power is responsible for operating the asset and earns a management fee for doing so.
Capital Power maintains an investment-grade S&P credit rating of BBB-. Management highlighted that the transaction continues the utility’s history of acquiring accretive gas assets with attractive contracts in growing electricity markets.
The stock tends to experience more ups and downs than its peers. Therefore, it could be a good buy on market corrections for a turnaround. Indeed, the dividend stock has declined about 19% over the last 12 months and now offers an attractive dividend yield of 6.5%.
Capital Power’s latest dividend growth guidance is 6% per year to 2025. At the recent price of $37.67 per share, the analyst consensus 12-month price target represents a discount of almost 18%. Even assuming no valuation expansion, we can approximate total returns of more or less 12% per year over the next couple of years.
