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Dividend-paying stocks are emerging as compelling alternatives to low-yielding bonds in Canada’s monetary easing environment. With the Bank of Canada having cut interest rates seven consecutive times since last summer before pausing in April, bond yields have compressed significantly, leaving income-focused investors searching for better returns.
Quality dividend stocks stand out for their ability to deliver steady income and potential capital appreciation while providing a measure of downside protection during market volatility.
For investors who are cautious about future rate movements or inflationary pressures, dividend equities represent a strategic middle ground, offering both the reliability of yield and the resilience of equities.
To ride out ongoing market fluctuations and economic uncertainty, investors may want to explore the following dividend-paying stocks within Morningstar’s Canadian equity coverage. These homegrown companies are also trading below their fair value, offering a margin of safety.
Canadian Tire Corp CTC.A Bank of Montreal BMO Bank of Nova Scotia BNS
How We Screened for Undervalued Dividend Stocks
We sifted through Canadian stocks covered by Morningstar equity analysts and identified those with 4- or 5-star ratings, meaning they’re trading well below their fair value estimates. From this selection, we picked those paying dividends. These stocks also boast strong balance sheets and sound capital allocation.
Canadian Tire Corporation
Canada’s leading general merchandise store, Canadian Tire sells a wide assortment of goods spanning automotive parts, home furnishings, appliances, and home improvement items from over 500 locations. More recently, the retailer has bolstered its footprint through acquisitions of various sporting goods and apparel chains.
While it does not hold a pronounced cost advantage, its iconic namesake banner enjoys over 100 years of relevance and resonates with Canadian consumers, a source of its brand-driven intangible asset.
Morningstar equity analyst Noah Rohr says the firm’s balance sheet is strong enough to manage its C$4.9 billion in debt obligations and C$ 2.5 billion in lease liabilities. “We also think shareholder distributions are appropriate,” he notes. “The firm typically targets a 30%-40% dividend payout ratio, which we view as reasonable and allocates excess cash to share repurchases.” Repurchases are a lucrative use of cash when shares trade below their fair value estimate, says Rohr, who recently raised the stock’s fair value to C$165 per share from C$160.
Explore Canadian Tire’s dividend history.
Bank of Montreal
BMO is one of six domestic banks that hold almost 90% of Canada’s banking deposits. It generates roughly 60% of its earnings from Canada, while the US accounts for the rest. With its more commercially focused book, the lender boasts a good share of its domestic commercial lending market, particularly for loans under C$100 million. BMO is also the second-largest exchange-traded fund provider in Canada.
“The company’s balance sheet is sound, its capital investment decisions are standard, and its capital return strategy is appropriate,” says Morningstar equity analyst Maoyuan Chen. “The bank is well capitalized, with a common equity Tier 1 ratio of 13.6% at the end of January 2025, which we view as sufficient.”
The bank’s capital return strategy is appropriate and “is largely in line with peers, with a focus on maintaining a healthy dividend (40%-50% payout ratio) and some additional earnings left over for share repurchases after internal investments,” notes Chen, who puts the stock’s fair value at C$146.
Explore BMO’s dividend history.
Bank of Nova Scotia
Bank of Nova Scotia is the third-largest Canadian-based bank by assets. The lender is Canada’s most international bank, deriving just over half of its revenue from Canada, over 40% from international operations (primarily Latin America), and a high single-digit percentage from the US. Latin America exposure gives the bank the potential for higher growth and return opportunities compared with peers, but it also exposes the bank to more risks.
Chen recently upped his 2026 forecast for the lender’s loan growth rate from 2% to 4%, as the bank is well-positioned to complete the bulk of work needed for balance sheet optimization, related to its international lending exposure, in 2025. He says that “the company’s balance sheet is sound, its capital investment decisions are standard, and its capital return strategy is appropriate.” The bank maintains a stable dividend with a payout ratio of 40%-50%, allocating any remaining earnings towards share repurchases, after internal investments.
He recently trimmed the stock’s fair value from C$77 per share to C$76, incorporating the bank’s C$1.36 billion impairment loss related to the culling of some of the less successful banking operations abroad.
Explore Scotiabank’s dividend history.
How to Find Undervalued Stocks to Buy
Undervalued stocks are those that trade below their appraised fair values. There are different ways to gauge a stock’s intrinsic value. There are standard metrics, such as price/earnings or price/cash flow. Some investors look at a stock’s price relative to a company’s future growth potential, or where a stock is trading relative to its highest price over the last 52 weeks.
At Morningstar, undervalued stocks are defined as those that are trading below the fair value estimates assigned by Morningstar analysts. That is then adjusted for what Morningstar terms uncertainty, both of which are folded into the Morningstar Rating for stocks. Stocks rated 4 and 5 stars are undervalued, those rated 3 stars are fairly valued, while those rated 1 or 2 stars are overvalued.
For more on how to put our stock-picking tools to work, check out Morningstar’s Guide to Stock Investing.
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
