The term “cheap dividend stocks” might apply to two types of dividend payers – discounted and undervalued. Both of them are desirable, and if a stock is both discounted and undervalued, and neither of those things is a symptom of a weakness in the business or its financials, that’s the ideal pick.
However, when choosing cheap dividend stocks for your Tax-Free Savings Account (TFSA) portfolio, and your goal is to start a healthy passive income, the discount and valuation are not the only two factors worth considering.
You also have to look into the dividend yield, sustainability, and the company’s financials. And it’s a good idea to look into its long-term performance prospects because it’s not a good idea to park your capital in a dividend payer that keeps shrinking that capital over time.
Aristocrats with a solid history trading at fair or below fair value might check many of the relevant boxes.
A life insurance giant
Manulife Financial (TSX:MFC) is a giant in the global life insurance industry. S&P Global placed it at the 20th spot, based on reserves and other factors, among the 50 largest life insurers in the world.
The company is old and has a massive global footprint, with a significant amount of its business coming from Asia. At the end of 2023, it had around $1.4 trillion in assets under management (AUM).
While not cheap per se, Manulife is quite attractive from a price point thanks to its modest discount of 9% (market-driven) and its fair valuation, reflected by a price-to-earnings of 14.7.
The discount slightly boosted its already decent yield to 4.6%, and if the stock continues to slide, the yield may become even more attractive. It’s also a dividend aristocrat with a solid history of growing its payouts for nine consecutive years.
The growth is quite substantial and between 2014 and 2024, the company has almost tripled its annual payouts. The payout ratio has remained stable over that period.
A pipeline giant
Energy is a massive sector in Canada, and many energy giants are among the largest publicly traded companies in the country.
This includes TC Energy (TSX:TRP), one of the pipeline giants in Canada, though this one stands out from the others, thanks to its natural gas focus. Its natural gas pipelines make up about 95% of its overall pipeline infrastructure, which is responsible for transporting 30% of all the natural gas consumed in the continent.
This makes it relatively stable for an energy company and highly resilient against external factors that may cause energy prices and other stocks to fluctuate. But it’s not immune to corrections and is currently in the process of recovering from one, though it’s still trading at a 20% discount to its last peak.
It’s also among the most generous dividend-paying energy stocks, currently offering a juicy yield of 6.4%. Moreover, it’s an aristocrat with a strong history, making the dividends safe for more than just the business model.
Foolish takeaway
The two dividend stocks are discounted, fairly valued, and offer yields that range from decent to excellent. Thus, both can make a fine addition to your TFSA portfolio. With a decent enough amount siphoned off to the two stocks, you can expect a solid monthly passive income to augment your primary income.
