3 Overlooked Canadian Stocks Offering Reliable Dividends…

As the Bank of Canada continues cutting rates to spur an economy facing multiple headwinds, dividend stocks are emerging as an appealing alternative to low-yielding bonds. Dividend-paying stocks can provide investors with both steady income and growth potential while offering a measure of downside protection during uncertain periods.

Amid ongoing market volatility, investors may want to explore undervalued, dividend-paying stocks within Morningstar’s Canadian equity coverage. These domestic players stand out as rare opportunities in a market largely overvalued following a strong 2024, when the Morningstar Canada Large-Mid Cap Index surged by 23%.

Nutrien NTRToronto-Dominion Bank TDMagna International MG

How We Screened For Undervalued Dividend Stocks

To screen for undervalued dividend stocks, combed through Canadian stocks covered by Morningstar equity analysts and identified those with 4- or 5-star ratings, meaning they’re trading at a discount to their fair value estimates. From this pool, we looked for those paying dividends. These stocks also have strong balance sheets and sound capital allocation.

Toronto-Dominion Bank

TD Bank is one of the two largest banks in Canada by assets and one of six that collectively hold roughly 90% of the nation’s banking deposits. The company’s balance sheet is sound, its capital investment decisions are exemplary, and its capital return strategy is appropriate. TD is well-capitalized, with a common equity Tier 1 ratio of 12.8% as of July 2024, well above the 11% minimum. “We view the company’s capital investments as exemplary, as the bank has avoided value-destroying products and expansions while pursuing sensible investments and growth opportunities, allowing it to build up one of the most highly profitable Canadian banking franchises,” says Morningstar equity analyst Michael Miller.

The company has been raising dividends consistently over the past five years, reflecting a prudent capital allocation strategy. “We assess the company’s capital return strategy as appropriate; it is largely in line with peers’, with a healthy focus on a dividend and some additional earnings left over for repurchases after internal investments,” Miller adds. However, the stock’s fair value was recently lowered from C$90 per share to C$88, due to losses tied to anti-money-laundering issues.

Explore TD Bank’s dividend history.

Nutrien

Nutrien is the world’s largest crop nutrient company by capacity and the largest agricultural retailer in North America and Australia, with a growing presence in Brazil. The stock trades at a 31% discount to its fair value estimate. The company’s focus on retail expansion has ensured stable and growing profits compared with wholesale-only peers.

The company has paid dividends consistently for over 10 years. “The dividend can generally be paid using free cash flow generated by the more stable retail business,” says Morningstar strategist Seth Goldstein. “As a result, Nutrien should be able to maintain the dividend even when fertilizer prices are at cyclically low levels.”

While Nutrien’s operates in a highly cyclical industry, its balance sheet remains sound and its debt maturities are manageable over the next several years. Because of this, Nutrien should meet its financial obligations. Investments in digital platforms will allow the retail business to smoothly transition to the increasing digitalization of the agriculture input market. Goldstein recently raised the stock’s fair value to C$97 per share from C$96, incorporating strong third-quarter earnings.

Explore Nutrien’s dividend history.

Magna International

Magna is trading 27% below its fair value estimate of C$87 per share. Magna is one of the largest and most diversified auto parts suppliers in the world. The firm’s capabilities are so broad that it can nearly design, develop, supply, and assemble vehicles all on its own.

The company has raised its dividend for 14 consecutive years, with a 2023 payout ratio of 33.5%. The firm’s approach to capital allocation reflects a sound balance sheet, fair investment, and mixed shareholder distributions. “Reinvestment in the business is the most likely key driver of total shareholder returns,” says Morningstar strategist David Whiston.

Management says the primary deployment of capital is to preserve liquidity and high investment-grade credit rating metrics, reinvest in operations (organic growth through innovation plus acquisitions), and return excess cash to shareholders including continued dividend per share growth with share repurchases.

Explore Magna’s dividend history.

How to Find Undervalued Stocks to Buy

Undervalued stocks are those that trade below their assessed values. There are different ways to gauge a stock’s worth. 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, and 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.

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