Better Buy for TFSA Passive Income: Telus Stock or TD Bank?

Telus stock and TD stock look cheap today. Is one really oversold?

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The market correction is giving dividend investors a chance to buy top TSX dividend stocks at cheap prices for a Tax-Free Savings Account (TFSA) portfolio. Telus (TSX:T) and TD Bank (TSX:TD) are long-time favourites among retirees and other investors seeking passive income.

Telus

Telus is Canada’s second-largest communications company with a current market capitalization near $39 billion. The stock trades close to $27 per share at the time of writing compared to the 12-month high around $34.

A steady slide over the past year has more to do with the broader market correction than with any specific issues at the company. Telus generated solid results in 2022. The company achieved 10% growth in cash flow from operations and free cash flow jumped 64% compared to 2021 to almost $1.3 billion.

Management expects 2023 to deliver strong results. Operating revenue growth will be in the 11-14% range with growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) anticipated to be 9.5-11%. The business should generate $2 billion in free cash flow this year. That’s all good news for dividend investors.

Telus typically increase the dividend by 7-10% per year. The current payout provides a 5.1% yield.

TD Bank

TD built up a massive pile of excess cash during the pandemic and has decided to use the funds to make two strategic acquisitions in the United States. The bank recently completed its US$1.3 billion purchase of Cowen, an investment bank, in a move that will beef up TD’s capital markets operations.

The larger deal is still unfolding. TD initially agreed to purchase First Horizon, a regional bank based in the southeastern part of the United States, for US$13.4 billion. Investors are wondering if the acquisition will close after the recent turmoil in the banking sector sent First Horizon’s share tumbling as much as 40% below TD’s purchase price.

TD’s stock fell in the past few weeks amid the broader selloff in bank stocks and is under added scrutiny from investors due to the First Horizon deal and TD’s existing American presence. TD already operates more branches south of the border than it does in Canada. The recent failure of two regional banks in the United States is making investors nervous. If the First Horizon purchase goes through, TD would become a top-six retail bank in the American market.

TD trades near $79 per share at the time of writing compared to $93 in February. Investors who buy at the current price can get a 4.8% dividend yield.

The noise in the bank sector is distracting investors from TD’s solid start to fiscal 2023. The bank reported adjusted net income of $4.155 billion in the fiscal first quarter (Q1) 2023 compared to $3.833 billion in fiscal Q1 2022.

Is one a better bet for TFSA passive income?

Telus and TD pay attractive dividends that should continue to grow. The stocks appear undervalued today and both deserve to be on your radar for a buy-and-hold TFSA portfolio targeting passive income. If you only buy one, Telus is probably the safer bet in the near term due to the ongoing volatility in the bank sector and the uncertainty around TD’s big acquisition.

TD, however, likely offers better upside potential for contrarian investors who don’t mind riding out some turbulence.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Telus.

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