Canadian investors on the hunt for cheap dividend growth stocks should consider several factors. The key is finding companies that offer a compelling mix of affordability, income potential, and long-term resilience. Many stocks that appear “cheap” on the surface may be value traps. These companies’ share prices are low for a good reason, such as declining revenue, excessive debt, or shrinking market share. However, there are also high-quality stocks that are temporarily undervalued due to market conditions, industry headwinds, or short-term earnings fluctuations. The challenge is distinguishing between the two.
What to watch
One of the most important factors in selecting a solid dividend growth stock is financial health. A cheap stock should still have strong free cash flow to support dividend payments and expansion plans. Debt levels should be manageable, as too much leverage can lead to financial instability, especially during economic downturns. The debt-to-equity ratio provides insight into a company’s ability to cover its obligations while still rewarding shareholders. A stable or improving return on equity (ROE) and return on assets (ROA) indicate a company uses its resources efficiently.
Beyond financial stability, a cheap stock’s dividend track record matters immensely. Companies that have a long history of dividend hikes demonstrate strong financial discipline, plus a commitment to returning value to shareholders. It’s worth checking a stock’s payout ratio, which measures the percentage of earnings paid out as dividends. A high payout ratio above 100% may indicate that a company is paying out more than it earns. Meanwhile, a reasonable payout ratio of 50–70% allows for both dividend growth and reinvestment in the business.
Valuation is equally crucial when considering a dividend growth stock. Investors should analyze valuation metrics. These include price-to-earnings (P/E) ratio, price-to-book (P/B) ratio, and dividend yield relative to historical averages and industry peers. A stock trading at a low P/E ratio compared to its historical range may signal an attractive entry point, particularly if earnings are expected to recover. Additionally, a high dividend yield may seem appealing, but if it’s significantly above the company’s historical average, it could be a warning sign that the market expects financial trouble ahead.
Consider Nutrien
With these principles in mind, Nutrien (TSX:NTR) stands out as a strong candidate for those seeking an undervalued dividend growth stock with long-term potential. Nutrien is the world’s largest provider of crop nutrients and a key player in the agricultural sector. As global food demand continues to rise, Nutrien is well-positioned to benefit from increasing fertilizer consumption and the ongoing push for higher agricultural productivity.
In its most recent earnings report, Nutrien reported third-quarter 2024 net earnings of $25 million, translating to $0.04 per diluted share. While this was a decline from previous quarters, revenue for the trailing 12 months still stood at $25.6 billion. Quarterly revenue growth declined by 5.3% year-over-year, reflecting softer market conditions. Yet the cheap stock remains financially sound. Its operating cash flow of $4.6 billion provides ample flexibility for dividends, debt repayment, and potential share buybacks.
Nutrien’s dividend profile is also noteworthy. The cheap stock currently offers a forward annual dividend rate of $3.11 per share, yielding approximately 4.1%. While its payout ratio of 145.3% seems high, this is largely due to temporary earnings compression rather than structural weakness. Over the past five years, Nutrien has maintained an average dividend yield of 3.5%, demonstrating its commitment to rewarding shareholders.
Looking ahead, Nutrien laid out a strategy focused on operational efficiency and cost-cutting, with a target of $200 million in annual savings by 2025. This proactive approach should help the company weather any short-term volatility in the fertilizer market while improving profitability. Additionally, Nutrien’s strong presence in the global agricultural supply chain ensures continued demand for its products, especially as emerging markets ramp up food production.
Bottom line
When looking for cheap Canadian dividend growth stocks, investors should prioritize financial stability, consistent dividend growth, industry resilience, and reasonable valuations. Nutrien checks many of these boxes despite recent earnings challenges. Its dominant position in the agricultural sector, strong cash flow generation, and commitment to returning capital to shareholders make it an attractive long-term hold. While short-term fluctuations may impact stock performance, patient investors stand to benefit from its long-term growth potential and steady income stream.
