Falling share prices are driving up dividend yields on some of Canada’s best dividend stocks. Buying stocks during a market correction takes courage as prices can certainly go even lower, but nabbing top TSX dividend-growth stocks on big dips for a self-directed Tax-Free Savings Account (TFSA) can turn out to be a very profitable move in the long run.
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TD Bank
Canadian bank stocks fell in recent months along with American banks after a run of bank failures in the United States triggered fears that more chaos could be on the way. Additional surprises should be expected as interest rates continue to increase and banks with weak capital positions and unrealized losses on bond holdings get squeezed.
The large Canadian banks, however, are not in the same risk class as regional banks south of the border. The Canadian capital requirements are higher and the big banks have diversified revenue streams. There is limited risk of significant deposit flight. In fact, the banks are taking in huge amounts of cash from investors who are scrambling to secure high rates on Guaranteed Investment Certificates (GICs).
The bank regulator is increasing the common equity tier one (CET1) capital ratio to 11.5% from 11%. All of the big five Candian banks are already above the new level. TD (TSX:TD) has the largest capital cushion in the group as of April 30, with a CET1 ratio of 15.3%.
That’s actually too much excess capital. The cash hoard is going to put near-term pressure on revenue and earnings growth until the bank finds new investments or acquisitions to deploy the cash. In the meantime, TD shareholders should be comfortable knowing the bank has adequate capital to ride out a financial crisis if one emerges in the next 12–18 months.
TD’s excess capital is due to its cancelled plan to acquire First Horizon, a U.S. regional bank, for US$13.4 billion. Management now intends to grow the U.S. presence organically over the next few years. TD might also decide to give investors a dividend increase or make a special bonus payout.
Management can take advantage of the low share price to buy back stock, as well. At the time of writing TD trades for $81 per share compared to $93 in February. Investors who buy TD stock at the current price can get a 4.75% yield.
Telus
Telus (TSX:T) gets the bulk of its revenue from essential mobile and internet service subscriptions from commercial and residential customers. The revenue stream should hold up well even if the economy goes through a recession.
Investors should see free cash flow expand to $2 billion in 2023. Telus is spending $2.5 billion on capital programs this year compared to more than $3 billion last year. The reduced investments should result in more cash being available for shareholders.
Telus wrapped up its copper-to-fibre transition last year and has made good progress on the expansion of the 5G network. These initiatives should lead to growth in premium service plans and can open up opportunities for new offerings.
Telus doesn’t have a media division, so it isn’t facing the same challenges as some of its peers. The company decided to invest in other segments and those moves could turn out to be significant drivers of revenue growth in the coming years. Telus Health is already a leader in providing digital services to doctors, hospitals, insurance firms, and businesses with employee benefits plans. Telus Agriculture has expanded to target the entire consumer goods value chain with its suite of digital products that help make the process of getting food produced and distributed more efficient.
The telco typically raises its dividend by 7% to 10% annually. The stock now trades below $25.50 compared to more than $34 at the 2022 high. Investors who buy the dip can get a 5.75% yield right now.
The bottom line on top stocks for passive income
TD and Telus pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA focused on passive income these stocks deserve to be on your radar.
