Retirees who use their Tax-Free Savings Account (TFSA) to generate passive income have a chance to buy some great Canadian dividend stocks at discounted prices. The market correction can be scary, and it isn’t fun to watch share prices on stocks in the portfolio fall, but the dips provide opportunities to put new money to work and pick up higher yields from top TSX dividend payers.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is somewhat unique in the Canadian bank sector due to its large international operations focused primarily on Mexico, Peru, Chile, and Colombia. These Latin American markets might seem to be an odd place for a Canadian bank to make big bets, but there is significant growth potential for loans, deposits, and investment product sales as the middle class expands. In addition, the four countries are members of the Pacific Alliance trade bloc that enables the free movement of goods, capital, and labour. Combined, the countries are home to more than 230 million people.
Emerging markets, however, come with risks, both financial and geopolitical. Bank of Nova Scotia’s share price performance has lagged its peers over the past five years. One reason could be investor concern about the exposure to Latin America.
Bank of Nova Scotia’s new chief executive officer has indicated that changes could be on the way after the company completes a strategic review of its operations. Pundits speculate that Bank of Nova Scotia might sell a good chunk of the Latin American businesses and use the funds to make acquisitions in other markets, including the United States. The four other large Canadian banks have made big bets in the U.S. in recent years, and their shares have performed better than Bank of Nova Scotia’s.
At the time of writing, Bank of Nova Scotia trades near $67 per share. The stock was as high as $85 a year ago.
Recession fears have hit the share prices of most banks in the past 12 months and the recent failures of some regional banks in the United States have investors wondering if more turbulence is on the way. Bank of Nova Scotia recently reported fiscal second-quarter 2023 results that indicated the bank is increasing its provisions for credit losses. This was a common theme across the Canadian bank sector.
Interestingly, the international division actually generated higher adjusted income for the quarter compared to the same period last year, as opposed to earnings declines in the other groups.
Bank of Nova Scotia has a strong capital position to ride out a recession and remains very profitable. The board just increased the quarterly dividend by about 3% to $1.06, so there can’t be too much concern at the executive level, regarding ongoing revenue and profit growth.
Near-term volatility should be expected, but investors might want to start buying BNS stock at this level. The dividend should be safe and now provides an annualized yield of 6.3%, so you get paid well to wait for the recovery.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is a giant in the Canadian energy sector with a current market capitalization near $82 billion. The company operates oil, natural gas, and gas liquids production sites that cover the full spectrum of the product mix. This includes oil sands, conventional heavy oil, conventional light oil, and offshore oil. The natural gas production and resource base in western Canada positions CNRL to benefit from international demand for liquified natural gas.
CNRL used the cash windfall from the rebound in oil and natural gas prices to reduce debt and buy back stock over the past two years, while also boosting the dividend. As net debt continues to decline, the company plans to return a higher portion of free cash flow to investors. Shareholders got a taste of this last August when CNRL paid out bonus dividend of $1.50 per share.
At the time of writing, the stock is down to $74 from the 12-month high around $88 per share. Investors can now get a 4.8% yield.
The bottom line on top stocks for passive income
Bank of Nova Scotia and CNRL pay attractive dividends that should continue to grow. If you have some cash to put to work inside a self-directed TFSA focused on passive income, these stocks look cheap right now and deserve to be on your watch list.
