Five Canadian Stock Ideas For July

As I’ve mentioned a few times, I am still reinvesting a portion of my dividends in retirement.

Even though I’m confident in my dividend income growing faster than inflation over time, I do this for one main reason. I only get one shot at this retirement thing, and I want to build in contingency plans to avoid having to go back to work.

And, to be completely honest, I like buying. I’m barely in my 40s, which is a little too early in life to coast to the finish line. So I’m out there doing stuff like trying to grow this newsletter, improve my golf game, and, mostly importantly (for this post, anyway), increase my dividend income.

Although a steadily increasing stream of dividends is the ultimate goal, I’m also looking to buy stocks with the potential to go up over time. Thus I insist on things like reasonable valuations, solid moats, boring old-school companies with a history of success, and so on.

So with that in mind, let’s take a closer look at a few of the stocks I’m currently watching with plans to perhaps purchase one or two in July.

Rogers Communications

Rogers Communications (TSX:RCI.b) is a free cash flow machine currently flying far under the radar as investors worry about peers like BCE or Telus, both of which hit five-year lows this week.

Investors are worried about the large amount of debt Rogers took on to acquire Shaw, a deal that closed in the early part of 2023. They also point out that the Shaw deal was mostly for cable assets, which is a dying industry.

But Shaw’s cable assets also have a few really big advantages. Firstly, cable still offers 50%+ EBITDA margins, even after subscribers call in and ask for discounts. These cable assets now stretch pretty much from coast-to-coast too, something the company’s competitors can’t match. And they do have a certain amount of pricing power; cable bills have a funny way of going up every year.

Rogers is also benefitting from strong growth in Alberta, which was Shaw’s strongest province.

As it stands today, Rogers trades for just under $50 per share. It continues to tell investors to expect about $3B in free cash flow in 2024, which works out to approximately $5.75 per share. That puts the stock at 9x free cash flow, with expectations free cash flow will go up in 2025 and 2026 as the company pays down debt.

In fact, the stock trades at a 10-year low price-to-free cash flow valuation.

The company also has loads of short-term liquidity, took on cheap fixed-rate debt with a long term to pay for the Shaw deal, and plans to tackle the debt by doing things like selling off non-core real estate.

The only thing I don’t like is Rogers likely won’t grow its dividend until 2025 or, more likely, until 2026, as it focuses on paying down debt. I strongly prefer dividend growth, so that’s a turnoff for me. Both Telus and Quebecor offer better dividend growth potential, so those might be alternatives.

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Bank of Nova Scotia

Bank of Nova Scotia (TSX:BNS) has gotten no love from the investment community for the last few years as other Canadian banks have put up better returns. Scotia’s LATAM assets are also hated as investors focus on the region’s tepid economic growth and political instability, instead of its potential.

But what bears are missing is Scotiabank is in the early innings of a pretty substantial turnaround plan. Yes, turnaround plans come with risk, but this one is pretty straightforward. New CEO Scott Thomson plans to sell the assets investors don’t like (like the Colombian assets) and focus most incremental investment into operations in Canada, the United States, and Mexico.

This is a solid plan. Scotiabank’s Canadian operations are solid, and only need a few tweaks to be more profitable. It is a top-five bank in Mexico, and it has an opportunity to tap into annual trade flows between Canada, the United States, and Mexico, Latin America’s second-largest economy. Plus, Mexico is attracting loads of investment from manufacturers, who are pulling out of China en masse.

In the meantime, shares are trading at just 9× 2025’s expected earnings, and the stock yields almost 7%. The value is certainly there, and the stock should trade at a higher valuation once the turnaround plan gets executed. Plus, bank earnings should improve as the Canadian economy recovers, so this will improve Scotia’s payout ratio over time.

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Also, keep your eye out for the Canadian Dividend Investing podcast, coming soon!

Magna International

Magna International (TSX:MG) has struggled a bit lately as a slowdown in the auto industry has hurt this parts supplier hard. In fact, normalized earnings per share are still below 2018’s peak even after the company has consistently repurchased shares over the last half-dozen years.

The company has been investing pretty heavily in making components for electric cars, which looks to be a winning long-term trend. But there will be bumps along the way, and investors are focused on those short-term issues. Magna was also heavily rumoured to lead the manufacture of the Apple Car, but the world’s largest smartphone maker kiboshed that project.

Cars are increasingly technological, and Magna is poised to compete well in that world. Adding more complexity to various car components should ultimately help what has become a commoditized business.

One factor keeping Magna shares down is the company’s disappointing margins. EBIT margins have dipped from a high of 8% in 2017 to a low of just over 5% in 2023. Management is taking various steps to get EBIT margins back up to the 7-8% range, including a robust cost cutting plan and the repayment of some debt, which will save interest costs.

Magna has been a consistent dividend growth stock, it buys back shares virtually every year, and the stock trades at under 8x forward earnings. It has issues, sure, but the shares are simply too cheap to ignore today.

I’ll share which stock(s) I end up purchasing with premium subscribers of the newsletter. They also get two exclusive posts per week, model portfolios, and dividend safety scores for 100+ Canadian stocks, plus much more. Upgrade today!

Morguard Residential REIT

Despite shares trading at close to a 52-week high, Morguard Residential REIT (TSX:MRG.un) is still one of the cheapest residential REITs in North America. 

The company values the portfolio at more than $30 per share, nearly 100% higher than today’s price of just under $16. It’s also cheap on a price-to-FFO perspective, with the stock trading at under 10x trailing funds from operations. That’s approximately 40% lower than most of its peers.

It also boasts a low payout ratio, with distributions coming in well under 50% of funds from operations. This gives the REIT plenty of excess liquidity to use to acquire new buildings, pay down debt, or repurchase undervalued shares in the public markets.

Morguard is also controlled by K. Rai Sahi, who is one of the best real estate investors in Canadian corporate history. Investors have soured on Sahi lately as they embrace sexy sectors like tech versus boring real estate, but you can’t argue against his long-term record.

That long-term record combined with Morguard Residential’s attractive valuation combines to make what should be a pretty solid long-term investment.

The other part of the bear case is about 40% of Morguard’s units are in Ontario, which is subject to rent control. But the company has had success raising rents on units where tenants move out, bringing them back up to market rent. It also has about 60% of its assets in the United States, which aren’t encumbered by rent control.

This is a summary of average rents charged in the last five years. As you can see, the company has successfully raised rents in both Canada and the United States. This is a trend that should continue over time.

If you’re interested in the criteria I’m looking for when I invest in REITs, check out this piece I wrote about the subject a couple of months ago.

Automotive Properties REIT

Automotive Properties REIT (TSX:APR.un) is another example of a Canadian REIT trading at an attractive valuation. It also offers a bit of growth potential, exposure to a unique asset class, and a diverse portfolio.

Let’s talk about that portfolio first. APR owns car dealership real estate and the ground underneath these buildings. Car dealerships are typically located on main roads and the company has focused on acquiring properties in Canada’s largest cities. That’s real estate I want to own over the long-term.

The company’s growth path comes from acquiring the real estate from various car dealership groups. This gives APR shareholders a solid return and allows dealership groups to extract value out of the asset — which further helps their expansion plans. Plus, Automotive Properties is the only player doing this in Canada, which pretty much ensures further growth.

It’s a perfect win/win scenario, which worked out well for investors from the 2015 IPO through 2022. Interest rates have gone up since then, which pushed the share price down. That’s creating today’s opportunity.

In 2023, the company earned $0.96 per share in FFO. The stock currently trades hands at $9.90 per share, giving us a price-to-FFO ratio of under 10x. That’s cheap. The stock also pays out $0.80 per unit in annual distributions, giving us a 8%+ yield with a reasonable 85% payout ratio.

Remember, a stock like this one doesn’t need a whole lot to go right for it to deliver low double digit returns. All it needs is to continue earning what it does today plus increase earnings by 1-2% annually — which it can easily do via contracted rental raises. Put the two together and you’re looking at an 11-12% annual return, with most of it coming from the distribution

One of my favourite pieces I’ve ever written is the story of Jim, a plumber who accumulated a $3M portfolio by his 50th birthday. Check it out, I think you’ll really enjoy it.

The bottom line

It’s a nice time to be an investor interested in Canadian dividend stocks. Plenty of high-quality companies are on sale, solid operators with a history of nice overall returns, steadily increasing dividends, and solid upcoming growth prospects.

These five are just the tip of the iceberg. There’s plenty of choice out there. Hopefully this post gave you a few ideas.