The market correction in top TSX dividend stocks is giving self-directed Registered Retirement Savings Plan (RRSP) investors who missed the rally after the 2020 crash another chance to get great dividend yields on their savings and set themselves up for attractive potential gains once the market rebounds.
CIBC
CIBC (TSX:CM) trades near $53 per share at the time of writing. That’s near the 12-month low and significantly down from above $80 in early 2022.
Interest rate hikes by central banks in Canada and the United States over the past year are designed to get inflation under control by cooling off a hot economy and bringing the jobs market back into balance. Higher interest rates often boost net interest margins for banks and can push up profits. However, the steep rise in rates over such a short period of time is putting over-leveraged borrowers in a difficult situation.
Companies and home buyers have binged on cheap debt in recent years. Payments on variable-rate loans immediately go up each time the central banks raise rates. Fixed-rate borrowers are shielded until they have to renew their mortgages. The longer interest rates remain elevated, the higher the risk that more commercial and residential borrowers will default.
Bank are already increasing their provisions for credit losses (PCL), and the trend is expected to continue in the coming quarters. CIBC raised its PCL in the fiscal second quarter (Q2) by $135 million compared to the same period last year.
Investors are concerned that the central banks will need to cause a severe recession to get inflation back to the 2% target. A jump in unemployment could set off a wave of defaults in the Canadian housing market and trigger a plunge in property prices. When prices drop below the amounts owed on the mortgages, the banks could be in for a rough ride. CIBC has a higher relative exposure to the residential housing market than its large Canadian peers, so its share price would likely take a bigger hit in that scenario.
For the moment, the housing market is holding up well, and banks are working with customers to find ways to ride out the era of higher rates. Economists broadly expect a recession to be mild and short, so the jobs market might ease back into equilibrium rather than suffer a shock.
The pullback in CIBC’s share price looks overdone. CIBC remains very profitable, and management raised the dividend when the bank reported fiscal Q2 2023 results. The company has a capital cushion that is comfortably above the level required by the bank regulator, so CIBC should be in good shape to ride out some turbulence.
Investors who buy the stock at the current level can get a 6.5% dividend yield.
TC Energy
TC Energy (TSX:TRP) has increased the dividend annually for more than two decades and intends to raise the distribution by 3-5% per year over the medium term, supported by the $34 billion capital program.
Management recently sold a 40% stake in some U.S. assets to raise $5.2 billion in cash, and TC Energy plans to spin off the oil pipelines business. These initiatives should take care of balance sheet concerns that have contributed to the decline in the share price over the past year.
The stock trades near $48 per share at the time of writing compared to more than $70 at the peak last year. Investors who buy TRP stock at the current level can get a 7.7% dividend yield.
The bottom line on top RRSP stocks
Volatility should be expected in the coming months, and more downside is possible. However, CIBC and TC Energy already look oversold and pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed RRSP, these stocks deserve to be on your radar.
