The pullback in the TSX Index is finally giving RRSP investors a chance to buy top Canadian dividend stocks at undervalued prices.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS)(NYSE:BNS) trades near $79 per share at the time of writing compared to $95 in February. The entire banking sector is down considerably in recent months, as investors try to figure out how big an impact rising interest rates will have on households.
High inflation is already putting household budgets under pressure, and the rate hikes implemented by the Bank of Canada and the U.S. Federal Reserve to bring inflation down are going to drive up mortgage payments and potentially push the economy into a recession.
A deep recession or a major crash in the housing market would be bad for Bank of Nova Scotia and its peers. Businesses might reduce borrowing or start cutting staff and mortgage defaults could soar. That being said, the likely outcome projected by economists is a mild recession. Things would have to get really bad in the housing market before Bank of Nova Scotia takes a material hit on the mortgage portfolio.
Even if things turn out to be worse than expected, Bank of Nova Scotia has a strong capital position and can ride out the downturn. At this point, the drop in the share price likely accounts for the medium-term risks.
Bank of Nova Scotia reported strong earnings in fiscal 2021, and the trend continued for the first half of fiscal 2022. The board raised the dividend by 11% late last year and recently increased the payout by another 3%. This should give investors confidence in management’s expectation for ongoing revenue and profit growth.
Bank of Nova Scotia is using some of the excess cash it built up over the past two years to buy back up to 36 million shares under the current repurchase plan. The company also increased its ownership of Scotiabank Chile earlier this year.
The international business continues to rebound after the pandemic hit. Bank of Nova Scotia’s international group posted fiscal Q2 2022 earnings of $605 million compared to $420 million in the same period in 2021.
The stock looks undervalued right now at 9.6 times trailing 12-month earnings and offers a solid 5.2% dividend yield.
TC Energy (TSX:TRP)(NYSE:TRP) is a major player in the North American energy infrastructure sector with more than $100 billion in assets located in Canada, the United States, and Mexico. The largest segment is the 93,000 km network of natural gas pipelines. TC Energy also has natural gas storage sites, oil pipelines, and power-generation facilities.
The company’s $25 billion capital program is expected to drive revenue and cash flow growth to support annual dividend increases of 3-5% through 2025. TC Energy is building a pipeline to bring natural gas from Canadian producers to a new liquified natural gas (LNG) facility on the coast of British Columbia. The company’s American infrastructure connects U.S. producers in the strategic Marcellus and Utica shale plays to the U.S. Gulf coast where LNG facilities can ship it to Europe and other international destinations.
The stock trades near $65 at the time of writing compared to $74 earlier this month. Investors who buy the pullback can now pick up a 5.5% dividend yield.
The bottom line on top dividend stocks for RRSP investors
Bank of Nova Scotia and TC Energy pay attractive dividends that should continue to grow. The stocks appear oversold right now, giving investors a chance to secure high yields and position their portfolios to generate strong total returns when the share prices rebound.