Cheap dividend stocks are the hidden gems of the investing world, offering a unique combination — one of affordability, consistent income, and the potential for significant capital appreciation. Unlike trendy growth stocks that rely heavily on the promise of future profits, dividend stocks provide tangible returns in the form of regular payouts, thus creating a steady stream of income even when the market gets choppy. Northland Power (TSX:NPI) and OpenText (TSX:OTEX) stand out as two particularly compelling examples. Both for attractive valuations and the ability to deliver value over time.
Northland stock
Let's start with Northland Power. With the dividend stock currently trading at $18.61, NPI offers a forward dividend yield of a generous 6.38%. That's a big deal in a world where many stocks provide little more than hope for future growth. NPI's business centres on renewable energy. A sector that is poised for decades of expansion as governments and corporations race toward decarbonization goals.
While its quarterly revenue dipped by 4.4% year over year, this isn't unexpected given the capital-intensive nature of renewable projects and the macroeconomic pressures on energy markets. However, its robust operating cash flow of $805 million demonstrates the company's ability to manage these challenges while maintaining its generous dividend.
NPI is also heavily investing in offshore wind projects. This represents one of the fastest-growing segments of the renewable energy market. These investments may weigh on short-term profits but are likely to pay off handsomely as demand for green energy continues to climb. With a substantial book value per share of $15.36, the dividend stock is trading close to its intrinsic value, thus making it an attractive option for value-conscious investors who also want exposure to long-term growth trends in renewable energy.
OpenText
On the other side of the spectrum, we have OpenText, a leader in enterprise information management that's proving tech companies can be dividend powerhouses, too. At $42.55 per share, OpenText offers a forward dividend yield of 3.42%. While not as high as NPI's yield, OpenText combines its dividends with strong growth prospects, making it a dual threat for investors.
In its most recent quarter, OpenText posted year-over-year earnings growth of 4.3%, highlighting its resilience even in a challenging macroeconomic environment. The dividend stock's acquisition of Micro Focus further strengthens its position, allowing it to expand its portfolio of enterprise software solutions and integrate recurring revenue streams.
OpenText's financial health is another key factor in its appeal. With a forward price-to-earnings (P/E) ratio of 8.26, it's trading at a significant discount compared to many of its peers in the tech sector. Its payout ratio of 58.53% ensures dividends are not only sustainable but also leave room for reinvestment into growth initiatives. OpenText's strong cash flows, with operating cash flow at $842 million, provide an added layer of confidence that the dividend stock can continue to reward shareholders while funding its future growth.
Bottom line
The broader appeal of cheap dividend stocks lies in their ability to provide stability in volatile markets. Unlike speculative growth stocks, dividend stocks tend to be established companies with strong fundamentals. Add the element of affordability, and you have a recipe for strong long-term returns.
Another point worth highlighting is the defensive nature of dividend stocks during downturns. While growth stocks can suffer sharp declines during market corrections, dividend stocks often fare better because their payouts provide a cushion. This makes them excellent choices for investors looking to weather market volatility without sacrificing returns. When these stocks are also undervalued, the potential for a double win of income and growth becomes even more compelling.
