The plunge in equity markets is finally giving Canadian savers a chance to buy top TSX dividend stocks at undervalued prices for their self-directed RRSP portfolios.
Bank of Montreal
Bank of Montreal (TSX:BMO)(NYSE:BMO) trades near $125 per share at the time of writing compared to $154 earlier this year. The steep pullback is widespread across the banking sector amid investor concern that a recession is on the way.
It’s true that an economic contraction could reduce borrowing by businesses and people are already cutting out discretionary spending due to high inflation.
The Bank of Canada and the U.S. Federal Reserve are raising interest rates to fight the inflation surge. The measures are designed to cool down an overheated economy, but the aggressive moves could also trigger a sharp decline in the housing market as over-leveraged property owners find themselves unable to pay increased mortgage rates and are forced to sell.
Despite the economic and housing risks, Bank of Montreal stock appears undervalued. The board raised the dividend by 25% late last year and recently increased the payout by another 4.5%. This would suggest that management isn’t too concerned about revenue and profits over the medium term.
On the growth side, Bank of Montreal is in the process of making a major acquisition south of the border. The company is buying Bank of the West for US$16.4 billion in a deal that will add more than 500 branches to the existing American operations, BMO Harris Bank.
Investors can now pick up a solid 4.4% dividend yield and wait for the bank sector to rebound.
Suncor (TSX:SU)(NYSE:SU) trades for close to $45 right now compared to $53 earlier this month. The drop in the price of WTI oil from US$122 to US$105 is the reason for the pullback, but Suncor appears undervalued right now even at US$80 oil.
The stock fell out of favour with investors after management cut the dividend by 55% in 2020 to preserve cash during the pandemic. Suncor had always maintained the payout during previous downturns.
As the price of oil rebounded Suncor used the cash windfall through most of 2021 to reduce debt and buy back stock. Late last year the board increased the dividend by 100% to bring it back to the 2019 level. Suncor announced another 12% dividend increase when the Q1 2022 results came out, bringing the distribution to a new high.
Suncor’s refining and retail businesses have recovered alongside rising fuel demand. As a result, the overall business should deliver strong results through the rest of this year.
Suncor stock traded at $44 when WTI was US$60 per barrel before the pandemic. All things being equal the share price should be much higher today. Investors who buy Suncor stock at the current level can pick up a 4.1% dividend yield.
The bottom line on top stocks for total returns
Bank of Montreal and Suncor appear undervalued today and pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed RRSP focused on total returns, these stocks deserve to be on your radar.