The latest leg of the market correction caused by the U.S. debt-ceiling fears is giving investors another chance to buy top TSX dividend stocks at undervalued prices for self-directed Registered Retirement Savings Plan (RRSP) portfolios. Buying on dips takes courage, but the long-term reward can be higher returns.
TD Bank
TD (TSX:TD) recently abandoned its planned US$13.4 billion takeover of First Horizon, a U.S. regional bank with more than 400 branches primarily located in the southeastern part of the country. As a result, TD is now sitting on a massive pile of excess cash. In fact, the company reported having a common equity tier-one (CET1) ratio of more than 15% at the end of the fiscal second quarter (Q2) 2023. Canadian banks are currently required to maintain a CET1 ratio of 11% to ensure they have the capital needed to ride out economic turmoil.
Based on the cash position, TD is probably the safest Canadian bank to own today for investors who are concerned that a major recession could be on the way. The downside of holding too much cash is a reduction in revenue and profits growth. TD says it will not hit its previous target of 7-10% earnings growth due to the cancellation of the First Horizon deal and the worsening macroeconomic conditions.
TD stock is down considerably in the past few months. At the time of writing, the shares trade below $77.50 compared to $93 in February.
RRSP investors with a contrarian strategy might want to start buying TD on any further weakness. The stock already appears oversold and the current dividend yield of 5% pays you well to ride out any additional volatility that might be on the way.
TD is a very profitable company with strong businesses in both Canada and the United States. Investors could see management use part of the excess cash to buy back more stock, boost the base dividend, or pay a bonus dividend. The company could also look for a new deal to take advantage of depressed valuations for bank stocks.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is a giant in the Canadian energy sector with a current market capitalization near $80 billion.
CNRL produces oil, natural gas, and natural gas liquids. The company has a diversified portfolio of oil and gas assets and owns 100% of most of its production portfolio. Not having partners on big projects carries more risk, but it also gives CNRL flexibility to move capital around the portfolio quickly to capitalize on shifts in oil and natural gas prices. This is one reason the company has been so successful over the past two decades. CNRL also has a strong balance sheet that enables it to make strategic acquisitions at opportune times to drive growth when commodity markets rebound.
The board increased the dividend in each of the past 23 years with a compound annual growth rate of better than 20% over that timeline. CNRL also started to give investors bonus dividends in 2022. Shareholders received an extra $1.50 per share last August. As net debt continues to fall CNRL plans to return a higher percentage of free cash flow to investors.
The stock is down from the 12-month high due to a pullback in the prices of oil and natural gas. At the time of writing, investors can get a 5% yield.
The bottom line on top stocks to buy now
TD and CNRL are top Canadian dividend stocks paying attractive distributions that should continue to grow. If you have some cash to put to work in a self-directed RRSP, these stocks deserve to be on your radar.
