Buying stocks during a market correction takes some courage, but the payoffs can be considerable for long-term investors who are building self-directed Tax-Free Savings Account (TFSA) retirement funds.
TD Bank
TD (TSX:TD) trades for less than $78 per share at the time of writing. That’s down from $93 four months ago and way off the $108 the stock fetched in early 2022.
TD stock is down amid the broader pullback in Canadian and American bank stocks. The 2023 decline is largely due to the surprise failure of three regional banks in the United States. Investors are concerned that more pain could be on the way for the bank sector, as rising interest rates put pressure on commercial and retail clients.
In the fiscal second-quarter (Q2) 2023 earnings report TD booked a provision for credit losses (PCL) of $599 million compared to $27 million in the same period last year. The story was similar across all the big Canadian banks, and investors should keep an eye on the PCL number in the coming quarters.
That being said, TD has the largest capital cushion among the large Canadian banks with a common equity tier-one (CET1) ratio of 15.3% at the end April. The Canadian regulator is raising the CET1 requirement to 11.5% from 11%. Even with the increase, TD is sitting on substantial excess cash.
TD has the extra funds because it recently cancelled its planned US$13.4 billion all-cash acquisition of First Horizon, a U.S. regional bank. On the positive side, investors and TD’s management team might have dodged a bullet, as TD had originally agreed to buy First Horizon for US$25 per share. The stock is now trading close to US$11. In addition, TD is arguably positioned best among the Canadian banks to ride out a financial crisis if one materializes in the next couple of years.
Weak earnings growth is the negative side of holding too much money. TD said it will not hit its goal of 7-10% earnings per share (EPS) growth due to the cancelled deal and worsening macroeconomic conditions.
Additional near-term volatility should be expected, but investors might want to start nibbling on TD stock while it is under pressure. TD remains very profitable, and investors should see some of the excess cash float their way through an increase to the base dividend, a bonus dividend, or share buybacks. TD could also look to take advantage of depressed bank valuations to make another acquisition.
TD’s compound annual dividend-growth rate averaged better than 10% over the past 25 years. Investors who buy the stock at the current price can get a dividend yield of close to 5%.
As the chart shows, buying TD stock on big dips tends to be a profitable move over the long haul.
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Canadian Natural Resources
CNRL (TSX:CNQ) is a leader in the Canadian energy sector with a portfolio of assets that includes oil sands, conventional heavy oil, conventional light oil, offshore oil, and natural gas production. The company enjoys a strong balance sheet and has a knack for making strategic acquisitions at discounted prices when oil and gas markets hit a slump.
Management is good at keeping expenses low and the team allocates capital quickly to take advantage of positive moves in commodity prices.
CNRL raised the dividend in each of the past 23 years with a compound annual dividend-growth rate above 20%. The stock trades near $70 at the time of writing compared to $88 at the peak last year. Investors who buy now can get a 5.1% dividend yield.
The bottom line on top TFSA stocks
TD and CNRL pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed TFSA, these stocks deserve to be on your radar.
