Canadian savers can take advantage of the market correction to add top TSX dividend stocks to their Tax-Free Savings Accounts (TFSAs) targeting passive income and total returns. Buying great stocks on dips takes courage, but the higher dividend yield and potential upside torque on a rebound can make the contrarian move a profitable one over the long term.
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CIBC
CIBC (TSX:CM) is the smallest of the five largest Canadian banks with a current market capitalization near $51 billion. The stock trades for close to $56.50 at the time of writing compared to a 12-month high above $70 and more than $80 in early 2022.
Over the past year, most bank stocks have come under pressure amid rising recession fears caused by the sharp increase in interest rates in the United States and Canada. The U.S. Federal Reserve and the Bank of Canada are trying to bring inflation back down to around 2%. To do this, they need to cool off an overheated economy and bring the employment market into balance. Hiking borrowing costs for businesses and consumers is perceived as an effective way to meet this objective.
The risk is that the economy could go into a meaningful recession and unemployment could surge. Homeowners are already struggling with higher costs for essentials and the sharp jump in rates on their variable-rate loans is eating into savings. As fixed-rate mortgages come up for renewal, even more property owners will struggle to make ends meet. A wave of job cuts would make the situation worse.
CIBC has a large Canadian residential mortgage portfolio relative to its market capitalization. As such, a meltdown in the housing market caused by soaring defaults and panic selling would likely hit the bank harder than its larger peers.
That being said, CIBC has a strong capital position and remains very profitable. The Bank of Canada expects a soft landing to occur for the economy. Employment is holding up well, despite the jump in interest rates and record levels of immigration should support demand for homes and condos, even if the market softens. As long as the worst-case scenario doesn’t materialize, CIBC stock looks oversold.
Additional volatility should be expected in the near term, but CIBC’s dividend should be safe, and investors can now get a 6% dividend yield.
Telus
Telus (TSX:T) trades for close to $27.50 at the time of writing compared to more than $34 at the peak in 2022.
Recession fears have investors worried that revenue could take a hit in the medium term. In addition, the sharp jump in interest rates makes it more expensive to fund capital projects. This can put a dent in cash flow available for distributions.
Products sales could slow down as customers decide to hold old phones for longer, but the revenue coming from mobile, internet, and TV service subscriptions should be resilient during an economic downturn.
In fact, Telus expects operating revenue to grow by at least 11% this year. Adjusted earnings before interest, taxes, depreciation, and amortization will increase at least 9.5%, according to current guidance. Telus is also targeting $2 billion in free cash flow for 2023, so dividend investors should see decent dividend growth in 2024.
Telus has increased the distribution annually for more than two decades. The board normally raises the payout by 7-10% every year. Investors who buy Telus stock at the current level can get a dividend yield of 5.3%.
The bottom line on top TFSA stocks
CIBC and Telus pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed TFSA, these stocks deserve to be on your radar.
