A correction in the share prices of top Canadian dividend stocks over the past year is giving investors who missed the rally off the 2020 crash a new chance to buy great TSX dividend stocks at discounted prices for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
CIBC
CIBC (TSX:CM) trades near $54 per share at the time of writing compared to more than $80 in early 2022.
The decline over the past 18 months has coincided with the increase in interest rates in Canada and the United States, as the central banks in the two countries try to get inflation under control. Rising interest rates are typically good for banks, as they can boost net interest margins. However, the steep increase over such a short timeframe has investors worried that the central banks will trigger a severe recession and set off a wave of loan defaults.
In CIBC’s case, the bank has a high relative exposure to the Canadian residential housing market due to its large mortgage portfolio. CIBC raised its provision for credit losses (PCL) in the fiscal third quarter (Q3) of 2023 due to increased risks of defaults caused by the rate hikes. If interest rates continue to move higher or stay elevated for too long, home and condo owners could be forced to sell their properties. In the event there is a surge in listings, and property prices plunge, CIBC would likely take a larger hit than its Canadian peers.
That being said, the general expectation among economists is that a recession will be short and mild if one occurs. CIBC finished fiscal Q3 2023 with a common equity tier-one (CET1) ratio of 12.2%. This is above the 11.5% regulators will require the banks to have before the end of this year, so CIBC has adequate capital to ride out some tough times.
The board raised the dividend earlier this year. Investors who buy CM stock at the current level can get a 6.4% dividend yield.
Telus
Telus (TSX:T) trades near $23.50 at the time of writing compared to more than $34 at the 2022 peak. The drop is largely due to the surge in interest rates. Telus uses debt as part of its funding strategy for its capital programs. Higher borrowing costs put a dent in profits and can reduce cash available for distributions.
Weaker revenue at Telus International, a subsidiary that provides global firms with IT and multi-lingual customer care services, will impact 2023 results. Telus recently reduced guidance for the year, but the company still expects to see decent growth in consolidated operating revenue and in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
As such, the pullback in the share price looks overdone. Investors who buy Telus stock at the current price can get a 6.2% dividend yield.
TC Energy
TC Energy (TSX:TRP) trades near $49.50 at the time of writing. The stock topped $70 in June of last year. Again, rising interest rates are making debt more expensive. Energy infrastructure projects take years to build and cost billions of dollars. A jump in borrowing costs puts pressure on margins and profitability.
TC Energy has also struggled with soaring expenses on its Coastal GasLink project, which will cost more than double the initial budget. The project is 90% complete, so the bulk of the hit should be in the rearview mirror.
Despite the headwinds, TC Energy expects its $34 billion capital program to generate enough cash flow growth to support annual dividend increases of 3-5% in the next few years. Investors who buy the pullback can now get a 7.5% dividend yield from TRP stock.
The bottom line on cheap TSX stocks
Ongoing volatility should be expected, but CIBC, Telus, and TC Energy look cheap at current prices and pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks deserve to be on your radar.
