In our search for the best undervalued Canadian dividend payers, we looked for stocks with 3%+ yields, consensus buy ratings, traded below consensus 12-month target prices, and had P/Es below their sector's average, explains Ari Charney, editor of Income without Borders.
That left us with 26 stocks that offer attractive yields at bargain prices. We further tightened our standards by looking for firms with payout ratios below 100% that generated positive free cash flows over the trailing year.
After all, we want to be reasonably confident that our dividend payers can actually sustain their payouts. That more than halved our list, to 10 names.
Since we like a rising paycheck, we narrowed our focus to companies that have grown their dividends over the past five years.
We then screened for companies that analysts expect to grow their earnings per share over the next three to five years. That whittled our list down to two names.
But as risk-averse income investors, we had to ditch one of the stocks because it exhibits the sort of volatility that might keep us up at night. That left us with Canadian life insurer Sun Life Financial (SLF).
If the mere thought of insurance is already lulling you to sleep, then good! We love dividends and hate drama, so the more boring, the better.
But here's what's exciting about Sun Life — its stock has a forward yield of 3.8%, while trading at just 11.4 times forward earnings.
Meanwhile, management has been aggressively de-risking the business, which has translated into more reliable earnings and greater dividend growth.
To help steady its business, Sun Life has been pushing into wealth and asset management, as well as group benefits, and diversifying internationally.
Although dividend growth flat-lined after the global downturn, over the past five quarters the payout has grown 12.5%. Analysts forecast further dividend growth of 10% annually over the next two years.
Sun Life also enjoys largely bullish sentiment among Wall Street and Bay Street analysts alike, at 12 "buys,” five "holds,” and no "sells.”
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By Ari Charney, Editor of Income without Borders
