Bargain hunters are starting to buy oversold Canadian dividend stocks for their self-directed Tax-Free Savings Account (TFSA) retirement fund. Buying great TSX dividend-growth stocks on dips takes courage, but the impact on total returns can be significant over the long haul.
Telus
Telus (TSX:T) trades near $25 per share at the time of writing compared to $34 at one point last year.
Over the past 12 months, the aggressive pace of interest rate increases by the Bank of Canada has had an impact on communications stocks, including Telus, that use debt as part of their funding mix for capital programs. Higher borrowing costs reduce profits and can put a dent in cash available for distributions.
Telus is spending a lot less this year on investments after wrapping up the bulk of its copper-to-fibre transition in 2022. As a result, free cash flow is still expected to be strong. In addition, Telus is providing good growth guidance for operating earnings and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), despite the recent negative revenue outlook from its Telus International subsidiary.
Telus has raised the dividend annually for more than two decades, and hikes tend to be in the 7-10% range per year. At the current share price, Telus appears undervalued, and investors can pick up a 5.8% dividend yield.
TD Bank
The share price of TD (TSX:TD) is catching a bit of a tailwind after the dramatic decline from the 2022 high of around $108 to as low as $76 in recent months.
TD trades near $86 per share at the time of writing and provides a 4.5% dividend yield.
Recession fears in Canada and the United States started to hit bank stocks early last year. The sector rebounded through the fall and into the start of the year and then fell off a cliff again this spring after a number of American regional banks went bust. TD is best known for its Canadian retail banking operations, but it actually has more branches south of the border.
The sharp increase in interest rates in both countries is putting pressure on holders of commercial and residential property loans. Defaults are expected to increase in the coming quarters as businesses and households burn through savings built up during the pandemic.
In the event rate hikes go too far and trigger a deep and prolonged recession, unemployment could surge, causing a wave of personal bankruptcies.
For the moment, economists broadly expect a short and mild downturn to occur as the rate hikes work through the system to reduce inflation. Even if things get ugly, TD has significant capital to ride out a downturn. In fact, TD is sitting on too much cash, which is one reason the stock remains so far off the 2022 high.
TD’s long-term compounded annual dividend-growth rate average is about 10%. Investors could see a decent increase announced before the end of the year, and TD is using some of the extra cash to buy back stock. Management intends to grow the American retail business organically over the coming years, opening up to 150 branches through 2027 after cancelling its planned US$13.4 billion acquisition of First Horizon, a U.S. regional bank.
The bottom line on top stocks for retirement investors
Telus and TD pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks look cheap today and deserve to be on your TFSA radar.
