Better Buy for Dividend Income: TD Bank Stock or BCE Stock?

TD and BCE are down from their 12-month highs. Is one stock undervalued now and good to buy?

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TD Bank (TSX:TD) and BCE (TSX:BCE) are top TSX dividend stocks that now trade at a discount to their 12-month highs. Retirees and other dividend investors seeking reliable and growing passive income are wondering if one of these stocks is undervalued today and good to buy for a self-directed Tax-Free Savings Account (TFSA) portfolio.

TD Bank

TD is the second-largest Canadian bank by market capitalization and is known for its retail operations in the country, but the company actually operates more retail branches in the United States. Building the American business through acquisitions has occurred over the past two decades, and TD is in the process of trying to make the U.S. group much larger.

Last year TD struck US$13.4 billion deal to acquire First Horizon, a regional bank located primarily in the southeastern states. The slide in bank stocks that started last summer had some investors wondering if TD had agreed to pay too much. Now they are wondering if the takeover will even get completed.

First Horizon trades for close to US$18 per share at the time of writing. TD’s purchase price is supposed to be US$25.

TD’s own share price is under pressure, as well. The stock trades for close to $82 compared to $93 in February.

Most bank stocks are down due to market fears that the recent failures of two U.S. banks and another in Europe are the start of a wave of trouble across the sector. Soaring interest rates have yet to work their way through the Canadian and U.S. economies, and investors are worried there will be more casualties in the banking sector, as loan losses mount.

Time will tell, but contrarian investors might want to take advantage of the pullback to add TD stock to their portfolios. The bank remains very profitable with a balanced revenue stream and could end up securing First Horizon at a cheaper price.

Dividend growth should continue at a steady pace, supported by TD’s anticipated earnings expansion of at least 7% this year. Investors who buy the stock at the current level can get a 4.7% dividend yield.

BCE

BCE is also feeling the pinch from higher interest rates. The company expects 2023 adjusted earnings to be lower than last year, partly due to a jump in borrowing costs. BCE and other telecom players use debt to fund part of their robust capital programs. BCE invested $5 billion in 2022 on capital projects, including the continued expansion of the 5G mobile network and the extension of its fibre-to-the-premises initiatives.

BCE’s media group is expected to face revenue headwinds if the Canadian economy slides into a recession in the next 12-18 months. However, the revenue coming from mobile and internet subscriptions should hold up due to the essential nature of these services.

BCE is projecting revenue and free cash flow to be higher in 2023 than last year, so investors should see another decent dividend increase in 2024. BCE raised the payout by more than 5% for 2023.

The stock is off the 12-month lows but still looks attractive near the current price of $64. Investors who buy now can get a 6% yield.

Is one a better pick today?

TD and BCE are top TSX dividend stocks paying solid dividends that should continue to grow. If you have some cash to put to work, TD probably has the most upside torque on a rebound but likely carries more near-term downside risk.

BCE should be a safer play if you are simply focused on passive income.

I would probably split a new buy-and-hold investment between the two stocks at these price points.

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.

Fool contributor Andrew Walker owns shares of BCE. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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