Investors who missed the big rally last year are wondering which Canadian stocks might still be undervalued and good to buy for a self-directed Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and long-term total returns.
One investing strategy for 2026 might be to consider companies that are working through a strategy transition while making progress on shoring up their balance sheets.
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Algonquin Power
Algonquin Power (TSX:AQN) trades near $9 per share at the time of writing. The stock gained 40% in the past 12 months, but is still down 60% over the past five years.
The plunge in the share price from $15 in the summer of 2022 to below $6 in late 2023 occurred in step with the steep jump in interest rates in Canada and the United States. Algonquin Power had too much debt on the balance sheet. As a result, the surge in interest expenses forced the company to slash the dividend to preserve cash flow. This upset income investors who had grown accustomed to Algonquin Power serving up annual generous dividend increases for years.
Lower revenues from the renewable energy assets added to the pain.
Algonquin Energy’s new management team is making progress on fixing the mess, and the rebound in the stock could pick up momentum in 2026. Algonquin Power abandoned its planned US$2.6 billion acquisition of Kentucky Power and has done a good job of stabilizing the balance sheet through sales of non-core assets, including its US$2.5 billion divestiture of its renewable energy business. The company is now focused on being a pure-play utility company with predictable rate-regulated revenue streams. Algonquin currently trades at a discount to peers in the rate-regulated utility segment.
The stock could also drift higher as management progresses the turnaround effort that is expected to drive return on equity (ROE) from 5.5% to 8.5% by the end of 2027. Investors who buy AQN stock at the current level can get a dividend yield of 4%.
Telus
Telus (TSX:T) is another contrarian pick right now. The stock trades at $18.50 at the time of writing compared to $34 at its peak in 2022.
As with AQN, this stock took a beating when the Bank of Canada aggressively raised interest rates to battle inflation. Rate cuts in 2024 and 2025, however, didn’t spur a rally in Telus as they did for other rate-sensitive companies. Price wars for mobile and internet customers put pressure on margins in 2024, and Telus had to take its Telus Digital (Telus International) subsidiary private after it suffered a downturn in revenue.
Telus recently decided to put dividend increases on hold. The company made some progress on debt reduction last year when it sold a 49.9% stake in the mobile tower business for $1.3 billion. Additional funds are expected to come from the monetization of its Telus Health subsidiary.
Near-term headwinds are expected, but the dividend should be safe as long as Telus is successful in its goal of reducing debt while protecting revenue streams. Investors who buy Telus at the current share price can get a dividend yield of 9%.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is further along in its turnaround efforts. This is why the stock rallied to a new all-time high in the second half of last year. Additional upside is possible, however, if the Bank of Nova Scotia continues to deliver rising ROE as it streamlines operations and shifts its growth investments more to the U.S. and Canada and away from Latin America where it has previously made big bets.
Investors can still get a dividend yield of 4.3% right now from BNS stock.
The bottom line
Algonquin Power, Telus, and Bank of Nova Scotia are making progress on their turnaround programs. Some turbulence is expected, but buy-and-hold investors with a contrarian style might want to put these stocks on their radar today.
