The recent pullback in a number of top Canadian dividend stocks is giving self-directed Tax-Free Savings Account (TFSA) investors a chance to buy great dividend payers at cheap prices. Stocks that regularly raise their distributions tend to bounce back from market corrections, so buying them on dips can also boost long-term total returns.
Royal Bank
Royal Bank (TSX:RY) is Canada’s largest bank with a current market capitalization near $168 billion. The stock trades for close to $120 per share at the time of writing compared to almost $140 in February.
Bank shares have been under pressure for the past three months amid increasing fears that more failures could be on the way after the surprise collapse of a few regional banks in the United States. Royal Bank and other global banking giants should be beneficiaries of deposit flight from smaller banks. However, Royal Bank’s fiscal second-quarter (Q2) 2023 results show that the bank is also setting more cash aside to cover potential band loans.
Royal Bank reported provisions for credit losses (PCL) of $600 million in the quarter compared to a PCL recovery of $342 million in the same period last year. The steep rise interest rates over the past year is starting to show up in bank results, as highly leveraged borrowers struggle to cover rising debt costs.
Near-term volatility should be expected, and more downside could be on the way, but Royal Bank deserves be a solid pick for a buy-and-hold portfolio at this level. The company generated $3.76 billion in adjusted net income in the quarter, and the board announced a 2% increase to the quarterly dividend. The new distribution of $1.35 per share provides an annualized dividend yield of about 4.5%.
Royal Bank has excess capital to ride out rough times and could even take advantage of the downturn in the sector to make another acquisition.
BCE
BCE (TSX:BCE) trades for close to $61.50 per share at the time of writing compared to more than $73 at the 2022 high.
Investors who buy the stock at the current level can get a solid 6.3% dividend yield and simply wait for the market to recover.
BCE increased the dividend by at least 5% in each of the past 15 years. The company expects 2023 adjusted earnings to dip compared to last year, as the increase in borrowing costs caused by rising interest rates takes a bite. That being said, BCE expects revenue to rise this year, even in this challenging economic environment. Free cash flow is also expected to be higher than 2022. That should support another decent dividend increase in 2024.
BCE enjoys a wide competitive moat and has the power to raise prices when its costs increase. This is important for investors to consider in the current environment of high inflation.
The bottom line on top TSX stocks to buy for dividends
Royal Bank and BCE are industry leaders paying 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.
