One of the biggest reasons investors buy dividend stocks is to generate a reliable stream of passive income. However, while many investors focus on the discount they get when a stock price falls, fewer realize they can often lock in a much higher dividend yield at the same time.
That’s why buying high-quality dividend stocks when they’re temporarily cheap can be so advantageous.
For example, if a company pays an annual dividend of $2 per share and its stock trades at $100, it offers a 2% dividend yield. However, if that same company continues paying the same $2 dividend while its share price falls to $50, the yield immediately jumps to 4%.
That’s why periods of volatility can often create excellent opportunities for long-term dividend investors. In many cases, the dividend never changes. The only thing that changes is the share price.
So, when high-quality businesses temporarily sell off, investors can not only buy those stocks at a discount, but they can also lock in a higher yield on cost before the share price eventually recovers.
That’s why these two top Canadian dividend stocks are some of the best picks to buy now before their prices rise and their yields fall.
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A top energy stock dividend investors can buy today
If you’re looking for a high-quality dividend stock to buy today while it trades well off its recent highs, Canadian Natural Resources (TSX:CNQ) is one of the first names worth considering.
CNQ has long been one of the highest-quality energy companies on the TSX thanks to its low-cost operations, massive reserve base, and ability to generate significant free cash flow across a wide range of commodity prices.
It has also built an impressive track record of returning that cash to shareholders through both growing dividends and share buybacks.
After rallying significantly during the war with Iran, the stock has since pulled back by roughly 20%, creating a compelling buying opportunity for long-term investors.
For example, just a few weeks ago, when CNQ reached a high of $70.99 per share, the stock was yielding 3.5%. Today, with the shares trading at roughly $56, that yield has climbed to about 4.5%.
That’s exactly the opportunity income investors have when they can buy a high-quality dividend stock while it’s temporarily trading at a more attractive valuation.
And while CNQ may not necessarily rally back to $70 in the near term, especially if the ceasefire in the Middle East holds and oil prices stay subdued, the company’s long-term outlook remains compelling.
It continues to improve its free cash flow generation, has years of growth potential ahead of it, and is widely expected to increase the percentage of free cash flow it returns to shareholders from 75% to 100% over the next 12 to 18 months.
A high-quality REIT offering an attractive entry point
In addition to CNQ, another high-quality Canadian dividend stock investors will want to consider today is Canadian Apartment Properties REIT (TSX:CAR.UN), the largest publicly traded residential REIT on the TSX.
That’s one of the biggest reasons CAPREIT has become such a popular dividend stock among Canadians. Its massive and highly diversified portfolio of apartment buildings consistently generates stable cash flow, much of which it returns to investors.
However, like many REITs, the stock has spent the last few years under pressure as higher interest rates weighed on valuations across the sector. As a result, not only is the stock trading well below its historical valuation, but its dividend yield has become much more attractive as well.
For example, CAPREIT currently trades at a forward price-to-adjusted funds from operations (P/AFFO) ratio of 16.3 times, well below its 10-year average of 23.4 times. At the same time, its current dividend yield of 4.4% is significantly higher than its 10-year average forward yield of 3.3%.
That shows how powerful it can be to buy high-quality dividend stocks when they’re trading at attractive valuations.
So, while CAPREIT remains out of favour today, it continues to look like one of the best dividend stocks to buy before its share price recovers and its yield begins to fall.
