BCE (TSX:BCE) and TD Bank (TSX:TD) are big TSX companies with strong operations and long track records of dividend growth. The share prices are down considerably from their 2022 highs and contrarian investors are wondering if one is now oversold and good to buy for a self-directed portfolio focused on dividends.
BCE
BCE spent roughly $5 billion last year on capital programs that included the extension of the fibre-to-the-premises initiative and the continued expansion of the 5G network. Canada is a big country with a relatively small population. In fact, the Greater Tokyo Area is home to about 37 million people compared to about 40 million in all of Canada, according to the latest population estimate.
BCE needs to invest significant funds to ensure the entire network infrastructure is capable of providing world-class mobile and wireline services. The company uses debt to fund part of the capital program. Rising interest rates will drive up debt costs this year and that’s one reason investors will likely see adjusted earnings slip compared to 2022. On the positive side, BCE expects revenue and free cash flow to increase. As a result, investors should still see a decent dividend hike for 2024.
BCE has increased the distribution by at least 5% in each of the past 15 years. At the time of writing, BCE stock trades close to $60 per share compared to a 2022 high around $73.
The pullback is likely overdone, and investors can now get a 6.4% dividend yield.
TD Bank
TD finished the fiscal second quarter (Q2) of 2023 with a common equity tier-one (CET1) ratio of 15.3%. That’s by far the highest among the large Canadian banks and significantly above the 11% currently required by regulators. TD built up the cash hoard to pay for its planned all-cash US$13.4 billion takeover of First Horizon, a U.S. regional bank. TD recently walked away from the deal citing regulatory challenges, so it now has a very full piggy bank.
On the positive side, TD is arguably the safest Canadian bank to buy today based on its capital reserves. That’s important if you are of the opinion that the Canadian and global economies are headed for another financial crisis in the next 12-18 months.
The downside of holding so much cash, however, is that revenue growth suffers. TD recently said it will not hit its adjusted earnings-per-share (EPS) growth target of 7-10% due to the cancellation of the First Horizon deal and a weakening macroeconomic situation.
TD stock trades below $81 per share at the time of writing compared to $108 in early 2022. The share price is actually off the 12-month bottom but still looks undervalued. Buying TD on big pullbacks has generally proven to be a savvy decision for long-term investors.
TD’s dividend has a compound annual growth rate of better than 10% over the past 25 years. Investors could see a generous dividend increase materialize before the end of the year. TD could also hand out a bonus dividend from the cash pile or ramp up share buybacks while the stock is out of favour. Another deal in a different market could also emerge to take advantage of low bank valuations.
Investors who buy TD stock at the current level can get a 4.75% dividend yield.
Is one a better pick?
BCE and TD pay attractive dividends that should continue to grow.
Investors focused on passive income over the next few years should probably go with BCE as the first choice due to the higher yield. That being said, TD likely offers a better shot at higher total returns over the medium term.
I would probably split a new investment between the two stocks at their current share prices.
