BCE (TSX:BCE) and Bank of Nova Scotia (TSX:BNS) are down considerably in the past year. Contrarian investors seeking dividends with high yields and a shot at some decent capital gains might want to start nibbling on these top TSX dividend stocks.
BCE
BCE has a revenue stream that should hold up well during a recession. The company’s wireless and wireline network infrastructure delivers essential mobile and internet services to businesses and households across the country. BCE has the ability to raise prices on its core services when it needs extra cash. This is important for investors to consider in an era of high inflation.
BCE continues to make the investments needed to protect its competitive position and ensure customers have the broadband they require. The company spent about $5 billion last year on projects that include the expansion of the 5G mobile network and BCE’s ongoing fibre-to-the-premises initiative that runs fibre optic lines right to the buildings of its customers.
BCE stock trades near $61 at the time of writing compared to more than $70 in April last year.
Higher debt costs due to rising interest rates will put pressure on profits in 2023, but BCE says it still expects revenue and free cash flow to increase compared to last year. That should support dividend growth.
The board typically raises the dividend by around 5% annually. At the time of writing the stock provides a dividend yield of 6.3%.
Government pressure to reduce service fees and make more bandwidth available to competitors could ramp up in the next two years, as the country approaches the 2025 election. This could add volatility to BCE’s share price in the near term. However, the stock already looks attractive at the current level, and you get paid well to ride out the turbulence.
Bank of Nova Scotia
Bank of Nova Scotia trades for close to $66 per share at the time of writing. That’s down from more than $80 at this time last year. Investors are concerned that persistent inflation combined with aggressive interest rate hikes will eventually lead to a wave of loan defaults by businesses and residential borrowers.
All the large Canadian banks increased their provisions for credit losses in the latest quarterly earnings statements, and the trend is expected to continue until inflation falls back to about 2% and the Bank of Canada begins to lower interest rates.
For the moment, the jobs market remains resilient. As long as unemployment doesn’t jump considerably, there should be a soft landing for the economy. However, if there is a deep recession and companies slash jobs aggressively, there is a risk that bankruptcies could skyrocket and property markets could tank.
In a worst-case scenario, Bank of Nova Scotia and its peers could get stuck with commercial and residential properties that are worth less than the value of the loans.
Despite these headwinds, the stock now appears oversold. Bank of Nova Scotia generated solid fiscal second-quarter (Q2) 2023 results. Net income came in at $2.16 billion compared to $2.75 billion. The bank set aside nearly $500 million more to cover potential bad loans. These losses might not materialize, but the provisions impact the earnings statement.
Bank of Nova Scotia finished fiscal Q2 with a common equity tier-one (CET1) ratio of 12.3%. This is a measure of the bank’s ability to ride out tough times. Canadian banks are required to have a CET1 ratio of 11%, so Bank of Nova Scotia is sitting on a nice capital cushion.
The new chief executive officer has launched a strategic review of the company’s operations. BNS stock has underperformed its peers in the past several years, so there could be some changes announced in late 2023 or early next year. Pundits speculate that Bank of Nova Scotia might decide to exit some of its international markets. The bank has significant operations in Mexico, Colombia, Peru, and Chile. Mexico will likely remain a focus for growth, but the bank could decide to monetize the assets in the other countries.
The board just increased the dividend by about 3%. Investors who buy BNS stock at the current level can get a 6.4% dividend yield.
The bottom line
BCE and Bank of Nova Scotia pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks deserve to be on your radar while they are out of favour.
