Investors love dividends, and it's no secret that dividends can play a crucial role in long-term returns. Thanks to the value of compound interest, if yields are consistently reinvested, returns from dividend stocks can far outperform their non-dividend-paying peers. In fact, as Morningstar’s Daniel Noonan reported, dividends alone accounted for more than 20% of the S&P 500′s total return during the period between 1993 and 2020.
Investors should not rely solely on dividend yield to pick stocks, however, other metrics are equally important. Some of these include:
Valuation
Economic Moat
Risk and Uncertainty
Some dividend investors may be quick to buy stocks boasting the highest yields. However, danger comes when income-seeking investors neglect a stock’s core metrics. As Noonan explains, high dividend yields do not always last, and they may even suggest looming cuts. Just because a stock offers a high yield does not mean that it will outperform in the long run.
Taking other factors into account, such as a company’s competitive edge and its current stock price, would prevent the income-seeking investor from making a hasty buy. After all, purchasing undervalued shares of companies with wide economic moats is a proven winning strategy.
Our Economic Moat Rating represents a company’s ability to outperform rivals and maintain a competitive edge within its market for years to come. Companies with Wide Economic Moats are forecast to fend off competition for 20 years or more. We predict those with Narrow Economic Moats to maintain market dominance for at least the next 10 years.
To find Canada’s most undervalued high-yield dividend stocks, we scanned the Morningstar Canada Dividend Yield Focus Index, a collection of highly rated, income-generating companies within the Morningstar Canada Index. We identified five names that earn a Morningstar Rating of 4 or 5 stars, meaning that they are currently trading below their fair value estimate. Each of them also benefits from a Narrow Economic Moat, meaning that we predict them to fend off competition for at least the next 10 years. Income-seeking investors may want to take a look at these companies, which our analysts consider well-positioned for long-term growth.
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