A Deep-Value Dividend-Growth Stock I’d Buy With an Extra $1,000

CP Rail (TSX:CP) stock is an intriguing dividend-growth play that could make higher highs by year-end.

| More on:
A stock price graph showing growth over time

Image source: Getty Images.

Investors should seek to maximize their margin of safety from every stock they look to purchase. After an explosive market rally, it can be tougher to do this, especially if you’re looking to place a bet on some of the high-flying momentum stocks out there that have made some market participants a tad euphoric!

Undoubtedly, it’s all too easy to follow the herd into the hottest stock of the day. And while generational trends (like those in generative artificial intelligence, or AI) may make the sky-high prices worth paying up for, I’m just unsure how things will end. Like it or not, hard-to-value momentum stocks can fold at the drop of a hat, especially when expectations have been raised to the roof.

When it comes to the hot AI and data centre stocks, I think some degree of AI premium is warranted. However, I’m unsure just how much is factored in at this juncture. Is there a good chance that too much AI hype is baked in? That’s the real risk of loading up on the plays that’s on everybody’s radar these days. Personally, I’d much rather look to the places where most others aren’t looking.

Value and dividend growth over hype and momentum

In this piece, we’ll look at one cheap dividend growth stock, which, while less attention-grabbing, can help you build long-term wealth in your TFSA (Tax-Free Savings Account) over the span of years. Yes, it’s not exciting to bet on old-fashioned dividend growers today when fast-growing AI firms and startups seek to change the world massively.

While passing on hot stocks in the AI scene could cause you to forgo big gains in the coming weeks and months, I think it’s far wiser to stick with stocks that you believe have a larger margin of safety than ones that may lack one or, worse, have zero margin for error. When perfection is baked in, it gets harder to top estimates.

However, if estimates and valuations are depressed, upside surprises are likelier. In any case, here’s an intriguing play I’d look to pursue with an extra $1,000 or more.

CP Rail

CP Rail (TSX:CP) stock faced mildly lowered expectations just weeks before shares took off, breaking through to new highs. Undoubtedly, the Kansas City Southern (KSU) deal wasn’t one that would pay off overnight. Moving ahead, though, the rail’s exposure to the two biggest North American borders (Canada-U.S. and U.S.-Mexico) could really help the firm gain ground above some of its rivals.

Over the next three years, we could see the KSU merger start paying great dividends. Indeed, opportunities from U.S.-Mexico freight movements could help CP Rail grow its dividend at a rate that’s the envy of most other rail plays that aren’t quite operating in such an efficient fashion amid subtle macro pressures. In short, the most benefit from KSU stands to be made from long-term investors. So, if you’re in for three years or more, CP stands out from the pack.

The stock trades at 28.9 times trailing price to earnings (P/E), with a 0.63% dividend yield. This is a small dividend today, but one that could gain ground in the coming years.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Pacific Kansas City. The Motley Fool has a disclosure policy.

More on Investing

alcohol
Tech Stocks

3 Magnificent Stocks That Have Created Many Millionaires, and Will Continue to Make More

Shopify stock is an example of a millionaire-maker stock that is likely to continue to thrive in the long run.

Read more »

Couple relaxing on a beach in front of a sunset
Investing

3 Stocks to Buy Now That Could Help You Retire a Millionaire

These three Canadian stocks are highly reliable and have tremendous long-term growth potential, making them some of the best to…

Read more »

hand using ATM
Dividend Stocks

Should Bank of Nova Scotia or Enbridge Stock Be on Your Buy List Today?

These TSX dividend stocks trade way below their 2022 highs. Is one now undervalued?

Read more »

A data center engineer works on a laptop at a server farm.
Tech Stocks

Why Hut 8 Stock is Up 44% in the Last Week

Hut 8 stock (TSX:HUT) has surged in the last week, and even more year to date. But if you think…

Read more »

Coworkers standing near a wall
Tech Stocks

Why Nvidia Stock Fell 10% Last Week

Nvidia stock (NASDAQ:NVDA) fell by 10% last week after its competitor announced an earnings date, but without preliminary results.

Read more »

A meter measures energy use.
Dividend Stocks

Here’s Why Canadian Utilities Is a No-Brainer Dividend Stock

Canadian Utilities stock is down 23% in the last year. Even if it wasn’t down, it is a dividend stock…

Read more »

edit Business accounting concept, Business man using calculator with computer laptop, budget and loan paper in office.
Dividend Stocks

Got $5,000? Buy and Hold These 3 Value Stocks for Years

These essential and valuable value stocks are the perfect addition to any portfolio, especially if you have $5,000 you want…

Read more »

Growing plant shoots on coins
Dividend Stocks

3 Magnificent Ultra-High-Yield Dividend Stocks That Are Screaming Buys in April

High yield stocks like BCE (TSX:BCE) can add a lot of income to your portfolio.

Read more »