The following dividend stocks may not be widely considered to be the top paying stocks in Canada, but they have plenty going for them – notably, very generous dividend yields and defensive businesses. Yet, these dividend stocks are undervalued and underappreciated.
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What is a dividend yield?
A dividend yield is essentially the return that you receive due to a stock’s dividend. It’s calculated by dividing the annual dividend payment by the company’s stock price. Sometimes, the dividend yield is higher due to share price depreciation, and sometimes it’s higher due to the company paying a large portion of its earnings to shareholders. And sometimes it’s a bit of both.
In this article, I’ll discuss three of the best dividend stocks that I think you should consider adding to your portfolio.
Enbridge
As one of North America’s leading energy infrastructure companies, Enbridge Inc. (TSX: ENB) has a lot going for it – 31 consecutive years of dividend growth, a low-risk business model, and a predictable and growing business that deals in essentials.
Enbridge’s business includes energy infrastructure such as pipelines, utilities, and gas storage assets. A portion of its business is regulated and much of its unregulated business is protected under long-term contracts. Also, as a nice bonus, more than 80% of the company’s earnings has built-in inflation protection. In summary, Enbridge is a defensive business that is predictable.
This translates into a dividend that’s reliable. Yet, despite all of this, Enbridge stock continues to trade at an elevated dividend yield of 5.6%. making Enbridge one of the best dividend stocks to own today.
Northwest Healthcare Properties
Another dividend stock that’s well-positioned in a highly defensive business is Northwest Healthcare Properties REIT (TSX:NWH.UN). Like Enbridge, Northwest is a dividend stock that is both high-yielding and defensive.
Today, the stock is yielding a generous 6.3%. It’s a yield that is both high and well supported. Northwest Healthcare Properties is an owner and operator of healthcare properties. Its portfolio includes hospitals, outpatient and ambulatory care centres, and medical office buildings. These buildings are essential – the population is aging and demand for them will only increase.
Also, these assets are characterized by long leases and they’re very sticky. The average weighted average lease expiry is currently 13.4 years. The occupancy rate is at 96.9%, and almost 85% of the leases are subject to rent indexation.
Northwest’s financials are improving, as the company has been selling non-core assets, paying down debt, and ultimately improving its cash flows. In turn, Northwest’s leverage and payout ratio are falling. In the latest quarter, its adjusted funds from operations increased 16% to $0.11 per share. This puts its payout ratio at 85%, compared to 99% in the same period last year.
Telus
Much has been said about Telus Corp. (TSX: T) and its move to halt dividend increases. Today, Telus stock is yielding an incredible 8.6% amidst its high debt burden and pressures on its mobile business.
But the company is taking action to address its debt burden and restore dividend growth. For example, certain divestitures and a plan to monetize the very successful Telus Health business will create an infusion of cash to the company, thereby allowing it to pay down some debt.
Telus’ business is defensive. We need the telecom giant as we head into an increasingly connected world. Telus will focus on its pure fibre connectivity as well as AI-powered home solutions and tech-enabled healthcare. Management released a very bullish three-year cash flow target – free cash flow growth at a minimum compound annual growth rate of 10%.
The bottom line
So what is a dividend yield? Ideally, it should be the guaranteed annual shareholder return.
It’s true that on top of having high dividend yields, all of these dividend stocks have high debt loads. This is both a function of the industries that they operate in as well as some missteps. And this has led investors to doubt their dividend yields. However, I go back to all of these companies’ strong, predictable cash flows and defensive businesses. In my view, this is what will get them out of the current difficulties, shore up their balance sheets, and continue to provide investors with reliable dividend income. This is what makes them some of the top dividend-paying stocks in Canada.
