This Is the Cheapest Dividend Stock I Know

Sleep Country Canada (TSX:ZZZ) stock is getting way too cheap after its latest tumble.

| More on:

Canada is home to some of the most interesting low-cost dividend stocks. With the unfavourable U.S. dollar exchange rate, Canadians have plenty of reasons to opt for TSX dividend stocks rather than their American counterparts. Why bother venturing south when yields are somewhat richer, with valuations slightly lower (at least on average) here in Canada?

Indeed, the Canadian economy is sure to roll over some rough terrain in the coming months. But the TSX Index, I believe, still looks quite cheap, at least relative to the U.S. averages. In this piece, we’ll check in with one of the most neglected dividend stocks that I think offer a good risk/reward tradeoff for investors seeking to build wealth for the next three years or so.

So, whether you’re looking for an income play for your TFSA (Tax-Free Savings Account) or a new holding to your RRSP (Registered Retirement Savings Plan), the following play may be worth a look.

Sleep Country Canada

Sleep Country Canada (TSX:ZZZ) stock is a sleep retailer that’s been steadily inching higher since last year’s lows. With earnings on tap later this week, questions linger as to what can help the leading mattress retailer get back on the high track.

Indeed, with the rather sluggish Canadian consumer who’s cautious about where they spend their money, expectations seem quite muted. With shares down around 30% from their highs, I think estimates are slightly on the conservative side going into the number. But that doesn’t mean I’d be a net buyer of shares ahead of the big reveal.

Though 13.4 times trailing price to earnings (P/E) isn’t all too high a price to pay for the firm, I think another “breather” or pause in the rally could be in the cards for a few more months before the rally resumes. Indeed, it’s not like consumers suddenly have enough to splurge on a big-ticket item like a mattress quite yet.

For now, I’d watch ZZZ stock closely. Once the economy really heats up, the stock could spike higher on the back of a surge in demand. Until then, I view ZZZ stock as rather untimely. The 3.5% dividend yield is great, but it could easily swell a bit more, perhaps on more of a dip. In short, Sleep Canada is a leader in its niche corner of retail. But headwinds remain horrid. And until they pass, I’d rather nibble than take a big bite of shares.

Looking ahead, Sleep Country’s newly-opened “super hub” storage facilities could really help kick operating margins into high gear. Such margin gains will be long-lived, and I suspect they’ll really start to move the needle higher once mattress demand comes back into full force.

The Foolish bottom line

With an excellent management team and some pretty decent recent results to build off of, ZZZ stock looks like a bargain buy for income investors. That said, I’d be a bit more cautious ahead of coming earnings, as they could go either way. If you’re keen on the name, perhaps buying a bit here and more after the result could prove prudent.

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 has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

More on Dividend Stocks

Asset Management
Dividend Stocks

TFSA: 3 Canadian Dividend Stocks to Buy and Hold for Decades

These TSX stocks have great track records of raising dividends in difficult economic times.

Read more »

chart reflected in eyeglass lenses
Dividend Stocks

Sell-off Alert: Don’t Miss These Undervalued Canadian Growth Opportunities

Sure, the market is down. But if you want growth stocks, consider these undervalued stocks due to pop right back…

Read more »

Dividend Stocks

Better REIT: RioCan vs Choice Properties?

Could RioCan REIT's exposure to Hudson's Bay make its 6.7% distribution yield inferior to RioCan REIT's growth offering?

Read more »

dividends can compound over time
Dividend Stocks

Grab This 14% Dividend Yield Before It’s Gone! 

Is a 14% dividend yield sustainable? This dividend stock can allow you to earn a 14% yield and regular capital…

Read more »

Two seniors walk in the forest
Dividend Stocks

Want Decades of Passive Income? 3 Stocks to Buy Now and Hold Forever

Looking to build decades of passive income? These three stocks will establish a growing income on autopilot.

Read more »

calculate and analyze stock
Dividend Stocks

CRA Warning: 3 TFSA Mistakes That Could Trigger an Audit

TFSA users who inappropriately use the investment account could be targets of a CRA audit.

Read more »

ETF stands for Exchange Traded Fund
Dividend Stocks

Here’s How Many Shares of ZWC You Should Own to Get $500 in Monthly Dividends

This BMO ETF holds Canadian dividend stocks and sells covered calls to generate steady monthly income.

Read more »

a person watches a downward arrow crash through the floor
Dividend Stocks

Why This Canadian Sector Is Plummeting and How to Protect Your Portfolio

There's one sector that's seriously in trouble lately, but don't worry. We have you covered with more stocks to consider.

Read more »