Editor's note: Read the latest on how the coronavirus is rattling the markets and what you can do to navigate it.
Fears of a recession are increasing. Last week, thanks to concerns around COVID-19, the steep fall in oil prices and bearish market sentiment, the S&P TSX Composite Index plummeted, losing 10% over the week. And then, on Monday, both the TSX and U.S. markets suspended trading shortly after the open.
Investors should generally stay calm, and proceed according to their goals and plans. As Morningstar’s director of personal finance Christine Benz says, “If you've taken the time to create an asset-allocation plan that makes sense for you given your life stage, you don't want to be monkeying with it in the midst of market volatility.” She points out that especially for younger investors, who have many years until retirement, volatility is your friend. “It doesn't feel like it, but it truly is your opportunity to sit tight with a stock-heavy portfolio, potentially even add more to that portfolio, if you don’t need the money for the next 5-10 years,” she says.
So if you do have a long-term horizon, now might be a good time to invest. Of the 70+ stocks in our coverage universe, more than 60 are currently undervalued. So there’s lots we can say about cheap stocks – and we have said a lot. We discussed cheap stocks, cheap stocks with a moat, and cheap stocks with a wide moat. Today, let’s talk about a Canadian investor favourite: dividends.
First, remember, as Morningstar Canada’s head of investment management Michael Keaveney says, investors should look beyond the headline dividend yield, to how sustainable the dividends and growth of dividends are, and the total payouts, which include the effects of share repurchases. “Indeed, in the long run, our research indicates that the cash flows that corporations supply, including payouts in the form of buybacks as well as dividends, are the ultimate drivers of stock returns,” he says.
Selecting the right dividend stocks
How do you pick stocks that might make sense? When we look for stocks, we look for competitive advantage, margin of safety, and valuation. So, we looked for stocks that have an economic moat, or a sustainable competitive advantage. We also added in our “Morningstar Rating for Stocks”, popularly known as the "Star Rating". The rating is determined by three factors: a stock's current price, Morningstar's estimate of the stock's fair value, and the uncertainty rating of the fair value. The bigger the discount, the higher the star rating.
On top of our ratings, we added the dividend payout ratio, which measures how much of a company’s annual earnings are used to pay dividends. A ratio of 1:1 indicates that a firm is giving back all its profits to shareholders. We also look at the historic yield (trailing 12 months) and compare that with the forward yield.
Here’s a look at the 20 undervalued stocks in our coverage universe with the highest historic yield, that also have a wide or narrow Economic Moat. Of these three, only one is a rare triple-threat: high yield, wide moat, and undervalued share price:
| Name | Yield % | Payout Ratio | Forward Yield % | Economic Moat | Moat Trend | Star Rating | Fair Value |
| Peyto Exploration & Development Corp | 21.82 | 0.30 | 21.82 | Narrow | Stable | 4 | 0.40 |
| Pembina Pipeline | 8.36 | 0.89 | 8.78 | Narrow | Stable | 5 | 0.61 |
| IGM Financial | 7.14 | 0.72 | 7.14 | Narrow | Negative | 4 | 0.83 |
| Enbridge | 6.99 | 1.12 | 7.48 | Wide | Stable | 5 | 0.72 |
| Canadian Imperial Bank of Commerce | 6.73 | 0.51 | 6.91 | Narrow | Stable | 5 | 0.69 |
| Bank of Nova Scotia | 5.98 | 0.52 | 6.08 | Narrow | Stable | 4 | 0.80 |
| Shaw Communications Class A | 5.91 | 0.87 | 5.91 | Narrow | Negative | ||
| Bank of Montreal | 5.82 | 0.47 | 5.99 | Narrow | Stable | 5 | 0.69 |
| BCE | 5.75 | 0.94 | 5.97 | Narrow | Stable | 4 | 0.82 |
| Shaw Communications Inc Class B | 5.69 | 0.87 | 5.69 | Narrow | Negative | 4 | 0.72 |
| Nutrien | 5.34 | 1.04 | 5.50 | Narrow | Stable | 5 | 0.51 |
| TC Energy Corp | 5.05 | 0.70 | 5.45 | Narrow | Stable | 4 | 0.86 |
| TELUS Corp | 4.97 | 0.78 | 5.06 | Narrow | Stable | 4 | 0.89 |
| National Bank of Canada | 4.95 | 0.42 | 5.17 | Narrow | Stable | 4 | 0.76 |
| The Toronto-Dominion Bank | 4.84 | 0.45 | 5.17 | Wide | Stable | 4 | 0.75 |
| Emera | 4.62 | 0.86 | 4.72 | Narrow | Stable | 4 | 0.96 |
| Royal Bank of Canada | 4.58 | 0.46 | 4.78 | Wide | Stable | 4 | 0.81 |
| CI Financial Corp | 4.25 | 0.31 | 4.25 | Narrow | Negative | 4 | 0.71 |
| Restaurant Brands International | 4.22 | 0.84 | 4.39 | Narrow | Negative | 5 | 0.64 |
| Fortis | 3.55 | 0.48 | 3.65 | Narrow | Stable | 4 | 0.97 |
Morningstar Direct Data as of March 15, 2020
