Enbridge (TSX:ENB) and Bank of Nova Scotia (TSX:BNS) trade well below their 12-month highs. The correction in the stock prices is pushing up the yields on their dividends. Retirees and other investors seeking reliable passive income from their TSX investments are wondering if ENB stock or BNS stock is now oversold and good to buy for a dividend portfolio.
Enbridge
Enbridge serves a key role in the smooth operation of the Canadian and U.S. economies. The company’s vast energy infrastructure network moves 30% of the oil produced in the two countries and about one-fifth of the natural gas used by American homes and businesses.
In addition, Enbridge has natural gas utilities that deliver fuel to millions of Canadian customers. The renewable energy division continues to grow its solar and wind assets in North America and Europe.
Enbridge trades near $49 per share at the time of writing. The stock was above $59 at one point last year.
Investors who buy the pullback can now get a 7.2% yield from ENB stock. Earnings for the first quarter (Q1) of 2023 came in similar to the same period last year. The company expects to generate adjusted earnings per share (EPS) growth of about 4% this year and distributable cash flow (DCF) growth of 3%. This should be sufficient to support a dividend increase for 2024. Enbridge raised the distribution in each of the past 28 years.
Bank of Nova Scotia
Bank of Nova Scotia trades for close to $65 per share at the time of writing compared to more than $90 in early 2022. The stock now offers a 6.5% dividend yield.
Bank stocks are under pressure after three regional banks in the United States went bust earlier this year. Investors are concerned that more disasters in the financial sector could be on the way. Smaller banks with narrow revenue streams and low capital reserves are more at risk of getting into trouble. High interest rates are putting pressure on borrowers, and defaults are expected to rise across the industry in the coming quarters.
The large Canadian banks, including Bank of Nova Scotia, are setting more cash aside to cover potential bad loans, but they remain very profitable and have adequate capital to ride out a downturn. Bank of Nova Scotia earned $2.17 billion in adjusted net income in fiscal Q2 2023 and finished the quarter with a common equity tier-one (CET1) ratio of 12.3%. This is above the 11.5% the banks will be required to maintain by the end of 2023.
Bank of Nova Scotia raised the dividend by about 3% when it reported the fiscal Q2 2023 results. Ongoing volatility is expected in the bank sector in the next 12-18 months, but the dividend increase suggests the board is comfortable with the revenue and earnings outlook.
Is one a better pick?
Enbridge and Bank of Nova Scotia pay attractive dividends that should continue to grow. I would probably make Enbridge the first choice right now for a portfolio targeting passive income. That being said, investors seeking a shot at big capital gains, along with good dividends, might want to buy Bank of Nova Scotia while it is out of favour.
