When it comes to building a long-term investment portfolio, Canadian value stocks are appealing for many reasons. Not only do they typically offer attractive dividends, but they also provide the potential for price appreciation as the market eventually recognizes their true worth. If you’re in it for the long haul, value stocks can be a relatively safe and rewarding way to grow your wealth. Here’s why I would focus on them for my own portfolio.
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A safer investment strategy with attractive dividends
Value stocks are typically considered a safer bet because they are undervalued by the market relative to their intrinsic worth. Investors seek out these opportunities to buy stocks at attractive valuations, expecting that the market will eventually correct itself. The upside is the potential for price appreciation, but what makes Canadian value stocks particularly appealing is the dividend income they might offer.
Canada has a favourable tax structure for dividend income, making dividend-paying stocks a fantastic source of passive income. Unlike ordinary income, Canadian dividend income is taxed at a lower rate, which increases the overall returns for investors. If you pick the right businesses and hold on to them for a long time, you can build a reliable income stream while enjoying capital growth.
Familiarity and convenience: Start with Canadian stocks
As a Canadian investor, you might consider starting with domestic stocks. The familiarity with local businesses can make it easier to understand the dynamics of these companies. By observing the largest holdings in iShares Canadian Value Index ETF fund, you can get value stock ideas. For example, the iShares Canadian Value Index ETF is heavily weighted with blue-chip companies like Royal Bank of Canada (TSX: RY), which makes up nearly 10% of the exchange-traded fund (ETF). This stock is an excellent example of a Canadian value stock that offers long-term growth potential.
Top Canadian value stocks to consider for your portfolio
Royal Bank of Canada (RBC) is one of the most prominent value stocks on the Canadian market. Recently, the market correction brought down the stock to a better valuation, with shares hovering around $157.
With its diversified operations spanning wealth management, personal and commercial banking, capital markets, and insurance, RBC is a solid choice for long-term investors.
Over the past decade, RBC has delivered an impressive compound annual growth rate (CAGR) of 11.8%, while its dividend growth rate has averaged 7.0%. With a current dividend yield of 3.75%, RBC offers investors both growth and income. Assuming a conservative 6% earnings growth, RBC could generate an estimated annualized return of 9.8% for the long term.
Another undervalued gem in the Canadian market is Canadian Natural Resources (TSX: CNQ), a major player in the oil and gas sector. Because of a 29% drop in its stock price over the last 12 months, CNQ now offers a high dividend yield of nearly 6%. Analysts believe the stock is trading at a significant discount of about 28%, which could present a buying opportunity. With more than two decades of dividend increases and a solid 10-year dividend growth rate of 16.9%, CNQ is a promising stock for investors looking for big dividend income in the energy sector.
The Foolish investor takeaway
Canadian value stocks often provide a good combination of income and growth, making them great for a long-term investment portfolio. By focusing on undervalued companies that offer reliable dividends, you can build wealth over time while benefiting from lower tax rates on dividend income.
In this market correction, it may be smart of investors to build their positions in blue-chip, value stocks like RBC and CNQ over time. By holding these stocks for the long haul, you can position yourself for steady returns and financial security in the years ahead.
