The market correction in top TSX dividend stocks over the past year is driving yields to levels not seen since the pandemic crash. Investors who missed the last rally are wondering which Canadian dividend stocks are now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) portfolio targeting passive income.
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Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is currently Canada’s fourth-largest bank with a market capitalization of $75 billion. The stock trades near its 12-month low right now at close to $63. This is down considerably from the $93 the stock hit in early 2022.
Soaring interest rates are driving up borrowing costs for businesses and homeowners. If rates go too high or stay elevated for too long, there could be a wave of defaults. Bank of Nova Scotia and its peers have already started to increase provisions for credit losses, and investors should expect the trend to continue in the coming quarters.
That being said, the overall loan book remains in solid shape, and the economy is holding up well, despite the steep rise in debt expenses. Economists broadly expect a short and mild recession to occur, as the Bank of Canada raises rates to get inflation under control. In that scenario, the drop in the share price of Bank of Nova Scotia appears overdone.
Even if a deeper recession occurs, Bank of Nova Scotia has adequate capital reserves to ride out a downturn. The bank finished the fiscal second quarter (Q2) of 2023 with a common equity tier one (CET1) ratio of 12.3%. This is above the 11.5% that Canadian banks will need to maintain by the end of the year.
Bank of Nova Scotia continues to generate solid profits, and the board increased the dividend when the bank reported the fiscal Q2 2023 results. Investors who buy the pullback can now get a 6.7% dividend yield from BNS stock.
Telus
Telus (TSX:T) has increased its dividend annually for more than 20 years. The company recently lowered its guidance for 2023 due to weaker demand for services at its Telus International subsidiary. The jump in interest rates is also pushing up borrowing costs, and this can put a dent in earnings.
Telus stock trades near $23 at the time of writing compared to more than $34 at the high point last year. Management still expects the company to deliver consolidated operating revenue growth of 9.5-11.5% and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth of 7-8% this year, driven by strength in the core mobile and internet businesses.
Telus is cutting 6,000 jobs to save about $325 million per year in costs. Charges related to the job cuts will result in free cash flow dropping to $1.5 billion in 2023 compared to the previous guidance of $2 billion. Capital expenditures are still expected to be $2.6 billion in 2023.
Despite the near-term challenges, the stock appears oversold and now offers investors a 6.3% dividend yield.
The bottom line on top stocks to buy for passive income
Ongoing volatility should be expected, but Bank of Nova Scotia and Telus pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks look undervalued and deserve to be on your radar for a TFSA focused on generating passive income.
