The market correction that has occurred in some sectors over the past year is giving dividend investors a chance to buy top TSX dividend stocks at undervalued prices for portfolios focused on passive income and total returns.
TD Bank
TD (TSX:TD) is the only big Canadian bank that didn’t announce a dividend increase when it released the fiscal second-quarter (Q2) 2023 earnings results. This might have surprised investors, but the reason for the decision is likely connected to TD’s recent decision to end its planned US$13.4 billion takeover of First Horizon, a U.S. regional bank.
Management has to decide what TD will do with the extra cash now sitting on the balance sheet. TD finished fiscal Q2 with a common equity tier-one (CET1) ratio of 15.3% — well above its Canadian peers and substantially higher that the 11% required by regulators. A dividend boost is probably on the way, potentially in the next quarterly announcement. TD might also ramp up share buybacks while the stock is out of favour. A bonus dividend would be nice to reward investors for their patience. TD might also look for a new acquisition target now that bank valuations are considerably lower than they were in late 2021 and the first half of 2022.
TD’s long-term dividend track record is impressive. The compound average annual growth rate going back to the 1990s is above 10%. At the time of writing, TD stock trades below $79 per share compared to $93 in February.
Investors can currently pick up a dividend yield of close to 5% and wait for the next increase to boost the return on the initial investment.
Telus
Telus (TSX:T) is an interesting player in the Canadian communications sector. Management decided not to follow the lead of competitors who spent billions of dollars on media assets. Pundits have mixed views on whether the lack of a media business will impede Telus in the future. Time will tell, but Telus seems to be doing just fine without a media operation.
Instead, the company has focused investments on other initiatives. Two current subsidiaries that could turn out to be meaningful contributors to revenue growth are Telus Health and Telus Agriculture and Consumer Goods.
Telus Health is a global provider of digital solutions for companies that have employee benefit plans. The group also has products used by doctors, hospitals, and insurance companies. Telus Agriculture started out as a business that helps farmers make their businesses more efficient through the use of digital solutions. The group is now expanding its offering to the entire consumer goods value chain from the producer right to the store shelves.
Telus gets the bulk of its revenue from essential wireless and wireline services, including mobile, internet, and security. Businesses and households need these services regardless of the state of the economy.
Telus expects earnings before interest, taxes, depreciation, and amortization to grow this year. Free cash flow is also expected to increase, due to lower capital spending. This should support solid dividend growth through next year.
Telus typically raises the payout by 7-10% annually.
The stock trades near $25.50 compared to more than $34 at the high last year. The pullback looks overdone, and investors can now get a 5.7% dividend yield.
The bottom line on cheap dividend stocks
TD and Telus 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.
