Who doesn’t love value stocks – those that are perceived to be cheaper than what they’re intrinsically worth? If these stocks were to revert to more normalized valuations, investors could book some nice capital gains.
Here are some top value stocks that pay out dividends so investors can get paid to wait.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) has been a disappointing stock for some time compared to its big Canadian bank peers. For example, over the last five years, the BMO Equal Weight Banks Index ETF delivered total returns of 57% for investors compared to Bank of Nova Scotia’s return of only 22%, according to data from YCharts.
BNS and ZEB Total Return Level data by YCharts
From observing valuation metrics like the price-to-book and price-to-earnings (P/E) ratios, Bank of Nova Scotia stock appears to be relatively cheap, as shown in the chart below.
BNS Price to Book and P/E Value data by YCharts
If the bank’s international strategy plays out over the longer term, earnings growth could resume, resulting in higher valuation multiples. In the meantime, at $65.59 per share at writing, the value stock offers a juicy dividend yield of close to 6.5%. Valuation normalization over the next five years could result in total returns of more or less 14% in the value bank stock.
Rogers Communications
Another stock that looks cheap is Rogers Communications (TSX: RCI.B). The big Canadian telecom stock has been trading in roughly a sideways range since the 2020 pandemic. That said, since it peaked at north of $74 per share in April 2022, the stock only made lower highs, which is not a good sign technically. Approximately $48 seems to be the technical base. If it breaks below that point, more pressure could come for the value stock in the short term.
At $53.64 per share at writing, the value stock trades at a P/E of about 11.5 based on adjusted earnings, whereas it normally trades as high as 15 times. At the recent price, its dividend yield of 3.7% is not bad. At fair value, the stock should be worth about $70 today for an upside of about 30%.
Surely, rising interest rates since 2022 has been one of the factors that is weighing on the stock. Higher interest rates mean a higher cost of capital and slower growth. If interest rates were to fall in the future, the dividend stock could see a nice boost in its valuation.
Big Canadian telecoms are also subject to a regulatory crackdown as Canada is among the most expensive for wireless rates compared to the rest of the world.
Investor takeaway
It is anyone’s guess if or when value stocks will experience normalization of their valuations and result in hefty price gains for investors. However, at least for these dividend stocks, they offer nice dividends for the wait. So, if investors have some extra cash lying around and seek to target higher long-term return prospects, they can consider putting a portion of their money in value stocks that pay nice dividends and have the potential of turning around.
