The Bank of Canada and the U.S. Federal Reserve are trying to get inflation under control by using high interest rates to cool off the economy and add some slack to the jobs market. A recession is likely on the way as a result and investors are wondering which TSX stocks are good to own for reliable passive income during an economic downturn.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) generated solid fiscal second-quarter (Q2) 2023 results and just increased the quarterly dividend from $1.03 to $1.06 per share. The stock, however, remains under pressure, as investors worry that loan defaults could soar in the coming quarters. Bank of Nova Scotia trades near $66 per share at the time of writing compared to above $90 in early 2022.
It is true that all banks will likely see bad loans increase, and Bank of Nova Scotia is already setting more cash aside to cover potential defaults. The provision for credit losses (PCL) jumped from $219 million to $709 million in the latest quarter compared to fiscal Q2 2022. That sounds like a lot, but Bank of Nova Scotia had $67 billion in total outstanding loans as of April 30.
The failure of three regional banks in the United States earlier this year indicates some segments of the bank industry are already facing significant difficulties. Not all banks are equal, and Canada’s big banks should be in good shape to ride out the potential turbulence. They have capital reserves that are above regulatory requirements designed to ensure the banks are capable of riding out a severe crisis. For example, Bank of Nova Scotia finished fiscal Q2 with a common equity tier-one (CET1) ratio of 12.3% compared to the current 11% minimum. Regulators are increasing this to 11.5% before the end of the year.
Average loan-to-value ratios are in the 50-60% range for most Canadian banks on their housing loans, so house prices would have to come down considerably before Bank of Nova Scotia and its peers take a material hit on defaulted mortgages.
BNS stock is probably oversold at this point and now offers a 6.4% dividend yield.
Enbridge
Enbridge (TSX:ENB) increased its dividend in each of the past 28 years. That’s a good track record through several severe economic downturns.
The company is a giant in the energy infrastructure industry with vast pipeline networks that move 30% of the oil produced in Canada and the United States and roughly 20% of the natural gas used by American homes and businesses.
Demand for oil and natural gas is expected to rise in the coming years, both in the domestic and international markets. Enbridge is positioned well to benefit. The company owns an oil export terminal in Texas and is a partner on a new liquified natural gas (LNG) facility being built in British Columbia.
Enbridge trades for close to $49.50 per share at the time of writing compared to the 2022 high around $59.50. Investors who buy the dip can now get a 7.2% dividend yield.
The bottom line on top dividend stocks
Bank of Nova Scotia and Enbridge pay attractive dividends that should continue to grow. If you have some cash to put to work in a portfolio targeting passive income, these stocks deserve to be on your radar.
