Buying dividend stocks on a pullback takes courage and the patience to ride out additional downside, but the rewards can be material over the long haul.
Investors who missed the bounce off the 2020 market crash now have another chance to buy top TSX dividend stocks at undervalued prices for self-directed Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) portfolios.
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Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is not participating in the rebound recently enjoyed by some Canadian bank stocks. The share price at the time of writing is nearly $65. That’s not far off the 12-month low around $63 and significantly down from more than $90 in early 2022.
Rising interest rates are stoking recession fears. The higher rates go, and the longer they remain elevated, the more likely it is that consumer spending will stall, businesses will trim staff, and loan defaults will start to soar.
In Canada, households are struggling with the double whammy of rising living costs and a spike in mortgage rates. With debt as a percentage of disposable income already near record levels before the Bank of Canada started raising interest rates, a sharp spike in unemployment while rates are high could trigger a wave of mortgage defaults.
If this were the main concern in the market, however, Bank of Nova Scotia’s peers should also be trading near 12-month lows. They are actually catching a tailwind, because economists are currently anticipating a soft landing for the economy.
As such, it appears that investors are more focused on Bank of Nova Scotia’s risks in the international business. The bank has large operations in the Pacific Alliance countries of Mexico, Peru, Chile, and Colombia. In the event there is another global recession, these markets would likely get hit hard due to their reliance on strong commodity prices. Political uncertainty is also an issue, and investors might think the potential rewards are not worth the risks involved in owning the shares.
At this point, the pullback is probably overdone. Bank of Nova Scotia remains very profitable and has an adequate capital reserve to ride out some turbulence. The board raised the dividend when the bank released the fiscal second-quarter 2023 results, so there doesn’t appear to be much concern about future revenue and earnings.
The new chief executive officer is expected to announce strategic changes in the coming months. An exit from some of the international markets might be on the table with the funds allocated to other growth opportunities.
BNS stock is a contrarian bet, but you get paid a solid 6.5% dividend yield today to wait for the rebound.
Telus
Telus (TSX:T) trades near $23.50 at the time of writing compared to more than $34 at the peak in 2022. The extent of the pullback looks overdone, even as rising borrowing costs put a pinch on earnings and trouble at Telus International (TSX:TIXT), a subsidiary, has forced a reduction of guidance.
In the July 13 update, Telus said it now expects to deliver full-year 2023 consolidated operating revenue growth of 9.5-11.5% and adjusted earnings before interest, taxes, depreciation and amortization growth of 7-8%. These are still solid growth numbers that should support continued dividend increases.
Telus has raised the dividend annually for more than two decades. Investors who buy the dip can now get a 6.2% yield from Telus stock.
The bottom line on TSX dividend stocks
Ongoing volatility should be expected, but Bank of Nova Scotia and Telus look oversold. The stocks pay attractive dividends that should continue to grow and offer high yields for a TFSA or RRSP portfolio.
