Interest rates have gone up meaningfully since 2022. After years of low interest rates, the Bank of Canada increased the benchmark interest rate from 0.25% to the current rate of 5%. This is one reason a re-rate of stock valuations was triggered. Investors can explore the stock market for dividend stocks on sale. Because investors can buy these stocks at discounted valuations, they can also generate nice income from a higher dividend yield.
Here are a few dividend stocks that are on sale now with great yields. Importantly, they tend to increase their dividends over time.
Dividend stock on sale
Fortis (TSX:FTS) is a blue chip stock that pays out reliable dividends, which is evident from a dividend-growth streak of 50 consecutive years. In a higher interest rate environment, the cost of capital has increased. As a result, the utility stock trades at a price-to-earnings ratio (P/E) of about 17.5, which is a discount of almost 10% from its long-term normal levels.
This doesn’t seem like a big discount, but Fortis stock tends to command a premium valuation for its predictability and quality. In time, investors can expect its stock to return to its long-term normal P/E. If the normalization occurs over the next three years, investors would pocket total returns of approximately 12% per year. If the valuation stayed the same, investors would get returns of about 8% per year in this period, which would still be not bad for a conservative stock.
At $54.59 per share at writing, the stock offers a nice dividend yield of 4.3%. This dividend is covered by a sustainable payout ratio of about 74% of adjusted earnings this year.
Another utility stock on sale
Here’s another utility stock that’s on sale with a higher yield. Brookfield Renewable Corp. (TSX:BEPC) stock has also been pressured by higher interest rates. The stock recently moved higher after revealing that it was collaborating with Microsoft to deliver over 10.5 GW of new renewable energy capacity in a five-year agreement.
This agreement is almost eight times larger than the largest single corporate power purchase agreement ever signed, which is an example of the kind of projects that this large renewable power and decarbonization solutions company could attract. This news could be the trigger for a turnaround in the stock. Specifically, the stock has climbed about 19% higher in the last week, indicating that it was too cheap to ignore.
At $38.80 per share at writing, BEPC yields 5%. Based on its history, investors can anticipate dividend growth of about 5% per year going forward.
Toronto-Dominion Bank stock yields 5.5%
For even more current income, investors can consider Toronto-Dominion Bank (TSX:TD). At $74.80 per share at writing, it offers a dividend yield of almost 5.5%, which is relatively high for the bank. Notably, the stock could experience more weakness as the U.S. investigation of its money-laundering allegations plays out. Currently, it is believed the fine will be north of $500 million. A CP24 article quoted National Bank analyst Gabriel Dechaine as follows: “…investors need to put greater weight on worst-case scenarios for the stock…The cumulative fines could easily hit $2 billion, while regulators could put in place restrictions, including limits on its balance sheet growth, that could affect bank operations for years.”
The one-off fine can be absorbed by TD’s earnings, which was for example $12 billion in the trailing 12 months. However, the latter scenario could weigh on the stock for the medium to long term as it would mean a lower earnings growth rate, leading to a lower stock valuation.
All investments come with risks. It may be a good idea for investors to focus on buying and holding shares of companies that can increase their dividend income over time despite the challenges these businesses face.
