Bank of Nova Scotia (TSX:BNS) and BCE (TSX:BCE) saw their share prices fall during the 2022 market correction and now offer attractive dividends yields. Contrarian investors seeking passive income and a shot at decent capital gains are wondering which stock might be undervalued today and good to buy for a self-directed Tax-Free Savings Account (TFSA) portfolio.
Bank of Nova Scotia
Bank of Nova Scotia is Canada’s fourth-largest bank with a current market capitalization of close to $88 billion. The stock trades near $73.50 at the time of writing. That’s up from $64.50 in December but still down more than 20% from where the stock traded a year ago.
Investors sold BNS stock through most of last year on rising fears that soaring interest rates could trigger a deep and extended global recession in 2023 or 2024. Bank of Nova Scotia has a large international business largely focused in Mexico, Peru, Chile, and Colombia. The pandemic hit these economies hard and markets might be concerned that a meaningful global economic downturn would depress copper and oil prices again and derail the rebound.
In Canada, a surge in unemployment would likely cause trouble in the housing market. Homeowners are already struggling with soaring loan costs and high inflation. If the tight jobs market reverses course, the loss or reduction of income could force a wave of mortgage defaults. Prices for goods and services are not likely to fall and the longer that interest rates remain elevated, the larger the number of households that will be forced to renew fixed-rate mortgages at higher rates.
At this point, economists predict a short and mild recession. Assuming that turns out to be the case, Bank of Nova Scotia looks undervalued. The company generated fiscal 2022 earnings that topped the 2021 level and the international division delivered strong results last year.
Investors who buy BNS stock at the current price can pick up a 5.6% dividend yield.
BCE
BCE trades for close to $61 per share at the time of writing compared to more than $73 last April. The pullback seems to be overdone with BCE’s solid performance in 2022, and the recent dividend increase for this year.
BCE delivered revenue, earnings, and free cash flow growth in 2022, despite a challenging environment. The board raised the dividend by 5.2% for 2023, and investors should see the payout grow in the coming years.
BCE continues to make the investments needed to drive revenue growth and protect its market position. The company is running fibre-optic lines directly to the premises of its customers and is expanding its 5G network.
BCE gets most of its revenue from essential mobile and internet subscription services. This should make it a good stock to own during an economic downturn. The media group, however, might see revenue drop, as advertisers reduce marketing expenses to protect cash flow. In the fourth-quarter 2022 earnings discussion, management also warned that higher interest rates will put a dent in cash flow this year.
Is one a better buy?
Bank of Nova Scotia and BCE both pay attractive dividends that should continue to grow. BNS stock is likely more oversold right now and offers a higher yield. If you have a contrarian investing style and think the recession fears are overblown, Bank of Nova Scotia might be the better TFSA bet today.
