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Markham, Ont.-based Pet Valu, which has mostly franchised stores, grew quickly during the pandemic as more people got pets, but same-store sales growth has slowed because it is selling fewer, higher-margin products such as toys, beds, and leashes.Sean Kilpatrick/The Canadian Press

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Many dividend-paying stocks have struggled this year amid concerns about high interest rates, a potential recession, and company-specific issues.

Although stocks with regular payouts were equity stars when interest rates were puny, they now compete against risk-free alternatives such as guaranteed investment certificates yielding 5 per cent or more.

Still, there is now speculation that the Canadian and U.S. central banks are done with hiking rates and could start cutting them next year as inflation abates. That means long-term investors have an opportunity to get quality dividend payers on sale before they begin to recover.

We asked three portfolio managers for their top picks among bargain dividend stocks.

Donny Moss, senior director and portfolio manager, North American Equities, iA Global Asset Management Inc. in Mississauga

The fund: IA Clarington Dividend Growth Class

The pick: Rogers Communications Inc. RCI-B-T

Shares of the telecommunications giant have been under pressure on concerns about higher interest rates affecting its debt expenses after it acquired Shaw Communications Inc. this year, Mr. Moss says.

However, Toronto-based Rogers Communications will be able to cut costs due to synergies from the merger, and that should increase earnings and cash flow to pay down debt, he notes.

Interest rates have probably peaked, so he believes “the concern over leverage will decrease. Canada will probably be cutting rates before the U.S.”

The worst is also probably over on worries about the price war among telcos, which are also getting a nice tailwind from rising immigration, he says. Rogers’ net wireless additions last quarter were the highest on record, he notes.

Rogers’ stock trades at a substantial discount to its peers, BCE Inc. BCE-T and Telus Corp. T-T, he says. “We think Rogers should trade at least in line with its peers.”

The pick: Enbridge Inc. ENB-T

This Calgary-based oil and gas pipeline giant has been among the higher-yielding names hurt by rising interest rates, Mr. Moss says.

Enbridge’s shares have been affected by concerns about its increased debt load to buy three U.S. natural gas utilities, while a recent equity issue to help finance this purchase also put pressure on its stock price, he adds. Benefits from the acquisition will not be apparent until the deal closes next year. Still, the leverage is within Enbridge’s target range, and it can sell other assets if it needs to lower its debt level, he says.

“We feel the company is still going to grow its earnings and cash flow,” he adds.

Enbridge has a 7.6-per-cent dividend yield that is well covered by 65 to 70 per cent of its cash flow, he notes.

The company has raised its dividend every year since 1996, and “we expect that to continue,” he adds. “We feel the stock is undervalued. It’s trading at a discount to its historical range.”

Robert Lauzon, chief investment officer and portfolio manager, Middlefield Capital Corp. in Toronto

The fund: Middlefield Income Plus Class

The pick: TransAlta Corp. TA-T

Shares of the Alberta-focused independent power producer have struggled on interest rate concerns and other headwinds, Mr. Lauzon says. Although rising interest rates do affect borrowing costs for Calgary-based TransAlta, it does have a lower level of debt than some peers, he notes.

However, it is among utilities with renewable energy exposure that have seen margins hurt on wind and solar projects because of rising construction costs, he says.

Earlier this year, TransAlta acquired the rest of the shares of TransAlta Renewables Inc. that it did not own to simplify its corporate structure, so its stock is now a “cleaner story” for potential investors, he says. “In a year, I see its stock trading around $14 to $15 a share [from around $11 today].”

Although Alberta power prices have fallen from very robust levels, they’re still higher than normal, he notes. TransAlta’s recent deal to buy Heartland Generation Ltd. and its power generation business will also be accretive to free cash flow, he adds.

The pick: Dream Industrial Real Estate Investment Trust DIR-UN-T

Dream Industrial REIT is part of the fastest-growing area of real estate development propelled by the e-commerce trend, but the price of its units has been hurt by higher interest rates, Mr. Lauzon says.

There is concern about rising interest-rate expenses when the Toronto-based REIT needs to refinance debt needed to grow its portfolio of industrial properties, he says. Still, the REIT is doing well with about a 97-per-cent occupancy rate as demand grows for quicker, “last-mile” delivery, and the trend to onshoring manufacturing, he says.

Dream Industrial is also increasing its net operating income by about 7 per cent a year because it gets higher market rents when the leases roll over, he adds. But the REIT should get a tailwind from the interest rate cuts expected next year and in 2025, he adds.

Dream Industrial is trading at about a 20 per cent discount to its estimated net asset value of between $15 to $16 a unit, he says. “I think it will be $15 a unit by the end of 2024 [from $12 today].”

Michael Simpson, portfolio manager, NCM Investments in Toronto

The fund: NCM Dividend Champions

The pick: Pet Valu Holdings Ltd. PET-T

Shares of the pet supplies retailer have taken a hit amid a slowing economy that’s affecting consumer spending, Mr. Simpson says.

Markham, Ont.-based Pet Valu, which has mostly franchised stores, grew quickly during the pandemic as more people got pets, but same-store sales growth has slowed because it’s selling fewer, higher-margin products such as toys, beds, and leashes, he notes. Still, sales of pet food will hold up during recessionary times, he adds.

Pet Valu buys most of its dog food in U.S. dollars, so the weaker loonie has hurt a bit. Competition in Canada from U.S.-based Chewy Inc., an online retailer of pet supplies, is not worrisome, he says. Chewy is only focused on the Greater Toronto Area now and competes against big box retailers, while Pet Valu has a niche offering healthier pet foods, he notes.

Pet Valu pays a small dividend now because it’s focused on growing new stores. Its stock is attractively valued and has been trading more recently at about 16 times forward earnings, he says.

The pick: Capital Power Corp. CPX-T

Shares of this North American independent power producer have struggled amid rising interest rates and other headwinds, Mr. Simpson says.

Edmonton-based Capital Power has mostly natural gas plants, but it’s also investing in renewable energy. There’s some investor concern about falling electricity prices as more power projects come online, he notes. And there are also worries about a lack of growth opportunities following the Alberta government’s decision last August to pause on approving new renewable power projects for seven months, he says.

Rising borrowing costs for Capital Power’s debt is less of a concern because the Bank of Canada is expected to start cutting interest rates next year, he adds.

Capital Power shares are attractively valued because they trade at a discount to peers, he says. The utility, whose dividend has had an annual compounded growth rate of 7 per cent over the past decade, plans to raise its payout by 6 per cent annually to 2025.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/02/24 4:00pm EST.

SymbolName% changeLast
CPX-T
Capital Power Corp
+0.42%38.14
PET-T
Pet Valu Holdings Ltd
-2.35%30.72
DIR-UN-T
Dream Industrial REIT
-1.73%13.03
TA-T
Transalta Corp
-3%9.37
ENB-T
Enbridge Inc
+0.04%46.67
T-T
Telus Corp
-1.38%23.64
BCE-T
BCE Inc
-0.14%50.42
RCI-B-T
Rogers Communications Inc Cl B NV
-1.03%60.31

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