Investing in undervalued dividend stocks can help you benefit from passive income as well as capital gains. Here are two such cheap dividend stocks you can buy to boost your passive income and deliver outsized gains over time.
Polaris Renewable Energy stock
Valued at $285 million by market cap, Polaris Renewable Energy (TSX: PIF) pays shareholders an annual dividend of $0.82 per share, indicating a forward yield of 6.1%. Polaris Renewable is engaged in the acquisition, development, and operation of clean energy projects in Latin America. With operations in five Latin American countries, Polaris owns a geothermal plant, four hydroelectric plants, and three solar projects with a combined energy capacity of 156 megawatts.
While Polaris reduced energy production by 2% in the first quarter (Q1) of 2024, its sales increased to US$20.6 million from US$20.1 million in the year-ago period. Polaris attributed top-line growth to increased prices, as its power purchase agreements for Peruvian facilities are linked to inflation.
The company ended Q1 with an operating cash flow of US$8.9 million, allowing it to pay shareholders a quarterly dividend of US$0.15 per share. Polaris also reported a cash balance of US$45.6 million, which allows it to reinvest in growth projects and accretive acquisitions.
Analysts tracking Polaris Renewable expect adjusted earnings to expand from $0.67 per share in 2024 to $0.91 per share in 2025. So, priced at less than 15 times forward earnings, the TSX dividend stock is quite cheap and trades at a discount of 70% to consensus price target estimates.
After adjusting for its dividend yield, total returns may be closer to 75% in the next 12 months.
Enghouse Systems stock
Another cheap TSX dividend stock is Enghouse Systems (TSX: ENGH), which pays shareholders an annual dividend of $1.04 per share, indicating a yield of 3.6%. Enghouse Systems provides mission-critical, vertically focused enterprise software solutions for contact centres, video communications, digital health, public safety, and the transit market.
Enghouse just released its fiscal Q2 of fiscal 2024 (ended in April) results and reported revenue of $126 million, an increase of almost 11% year over year. It ended Q2 with recurring sales of $85 million, up 18.6% year over year. This segment includes SaaS (software-as-a-service) and maintenance services that allow Enghouse to generate stable cash flows across business cycles.
Similar to other asset-light tech stocks, Enghouse benefits from high operating leverage, which means its earnings grow at a faster pace than revenue. In Q1, Enghouse reported an operating income of $33.5 million, up 30.5% year over year.
In fiscal Q2, Enghouse Systems more than doubled its operating cash flow to $40.26 million, and it paid less than $15 million to shareholders in quarterly dividends. A low payout ratio has allowed the TSX tech stock to increase its dividends by 18% annually in the past decade.
Priced at 20 times forward earnings, ENGH stock is not too expensive as it is forecast to expand earnings by more than 8% annually in the next two years. Analysts remain bullish and expect Enghouse stock to rise by 30% in the next 12 months.
