These 3 Canadian high dividend stocks are worth a look

When looking for large dividend stocks, there are a wide variety of factors to consider. These include earnings duration, recession resilience, dividend security and competitive advantage. However, geographical differentiation is something we find that investors often overlook.

US-listed Canadian stocks tend to be undervalued compared to their US-based counterparts, which not only means that the margin of safety is better for the shareholder, but also the dividend yields are higher. Here we present the profile of three Canadian high dividend stocks in three different industries that we like for their strong value and performance propositions today.

Note that all items in dollars below are US dollars, converted to Canadian dollars.

Enbridge Inc.

Our first shareholder is Enbridge (ENB), an energy infrastructure company based in Calgary, Canada. The company manages five sectors: Liquid Pipelines, Gas Transmission and Intermediate Flow, Gas Distribution and Storage, RES Production and Energy Services. Through these departments, Enbridge offers a wide variety of energy-related services from oil and gas transportation, collection and treatment facilities, wind and solar assets and more. Enbridge is a truly diversified energy company with traditional fossil fuels and renewable energy as part of its portfolio.

Founded in 1949, the company generates approximately $ 40 billion in annual revenue and $ 95 billion in market capitalization transactions.

We think growth is decent for Enbridge to move forward, estimated at 4% per year. Enbridge has a production history of fairly reliable growth, especially given the inherent instability of operating an energy business. However, the diversification of the company’s portfolio has served it well and we believe that its focus on renewable energy sources is a key factor of differentiation for the coming years.

The company continues to invest billions of dollars in development projects and the company is aiming for cash flow profits of 5% to 7% per annum. We are a little more conservative given the high profit base for 2022.

Enbridge’s competitive advantage is primarily its huge footprint, which counts greatly in a freight business. While Enbridge is not necessarily in a position to diversify its service offerings because it operates a freight business, scale is king and therefore we see competing threats limited.

We see strong overall returns of 8.2% for Enbridge in the coming years, as the stock has a good dividend yield of 5.6%, has an estimated annual growth of 4% and is slightly overvalued. The shares are trading at 11.5 times the cash flow today, which is slightly above our estimate of fair value. This should produce a minimum headwind in total yields of less than 1%.

Canadian Utilities Limited

Our next stock is Canadian Utilities (CDUAF), a company that operates a fairly large electricity and gas company in Canada. The company has services for the transmission and distribution of electricity, transmission and distribution of natural gas, storage facilities and more. It is mainly active in Alberta, the Yukon and the Northwest Territories.

Founded in 1927, Canadian Utilities generates approximately $ 3 billion in annual revenue and trades with a market capitalization of $ 8.4 billion. The company also has a very impressive series of 50 years of successive Canadian dollar dividend increases.

We see growth potential for Canadian Utilities at 4% per year, due to the combination of new projects and key interest rate increases. As a regulated utility, the company enjoys protection against new entrants, but that means it has to ask for price increases. However, the company has proven its ability to achieve these slow but steady price increases over time, and there is no reason why this should not happen.

The obvious competitive advantage for Canadian Utilities is that they are regulated, which means that it is tantamount to a service monopoly. This keeps the company’s profits fairly reliable and sustainable and means that there is virtually no competitive threat. This also helps Canadian Utilities cope with the recession and is a big reason why it has been able to increase its dividend for 50 consecutive years.

We expect annual returns of 6.2% to shareholders in the coming years from the combination of profit growth, return and change in valuation. We recorded an increase in expected earnings of 4% and stock returns of 4.5% today. There is, however, a compensatory factor ~ 2% opposite to valuation. This is due to the fact that the shares are trading for 17.5 times the profits of this year, which exceeds our estimate for a fair value of 16 times the profits.

The Bank of Nova Scotia

Our final shareholder is Bank of Nova Scotia (BNS), commonly referred to as Scotiabank. The company offers a wide variety of traditional banking products, such as deposits, checks and savings and various lending products. It also offers asset management services, business deposit and lending products, investment services and more. Scotiabank operates nearly 1,000 branches in Canada, as well as another 1,300 branches worldwide.

Scotiabank was founded in 1832, generates more than $ 25 billion in annual revenue and is currently valued at $ 80 billion in market capitalization.

Scotiabank has been growing at an average rate of around 5% per annum in recent years, and that is where we are assessing future projected growth. The bank’s Canadian markets are fairly stable and producing relatively modest growth. However, its Canadian markets offer economic and geopolitical stability.

We are seeing higher growth rates, but also higher levels of profit volatility, from the bank’s international markets, including places like Chile, Peru and the Caribbean. Scotiabank stands out from other Canadian banks with its relatively aggressive international push, and we like this effort to stimulate growth in the coming years, provided we take prudent credit risks.

Scotiabank’s competitive advantages are those of size and scale, as all banks offer about the same products and services for about the same prices. However, we believe that Scotiabank’s reputation, built almost 200 years ago, and its vast network help it compete with smaller new entrants.

The expected returns are very strong, reaching 11% per year. We see this resulting from the dividend yield of 4.7%, the projected growth of 5% and the valuation of 2% from the valuation. The shares are trading for just 10.3 times this year ‘s earnings, which is lower than our estimate for a fair value of 11.4 times the earnings.

Final thoughts

While high-yield stocks are available in the US for investors to choose from, we like Canadian stocks for their relatively low valuations compared to their US counterparts. It also helps to achieve above-average dividend yields, which is why we like Enbridge, Canadian Utilities and Scotiabank.

All offer very strong dividend yields and reasonable valuations, as well as medium single-digit profit growth opportunities in the coming years. In addition, they offer US investors some geographical diversification and we think they are worth a look for income-focused investors.

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