Canadian retirees are searching for ways to get better returns on their savings. One popular investing strategy to boost passive income from investments involves buying top TSX dividend stocks inside a Tax-Free Savings Account (TFSA).
The pullback in the share prices of many great Canadian dividend stocks over the past year is giving investors who missed the rally off the 2020 crash a new chance to get high yields from companies with good track records of dividend growth. These stocks should rebound as soon as rate hikes end.
BCE
BCE (TSX:BCE) is Canada’s largest communications company with a current market capitalization of close to $50 billion. The stock currently trades near $55.50 compared to $65 in early May.
The drop is largely due to the continuation of rate hikes by the Bank of Canada after it paused earlier in the year. The central bank is increasing interest rates to try to get inflation back down to the 2% target. Higher rates increase debt payments for businesses and households. This is expected to force consumer and commercial spending to slow down and subsequently loosen up the tight labour market that is driving wage growth. Higher wages lead to higher product prices.
BCE uses debt as part of its funding strategy to pay for investments in new communications infrastructure. The company spent roughly $5 billion in 2022 on projects that include running fibre optic lines to the buildings of customers and the expansion of the 5G network. These initiatives should position BCE for long-term revenue growth, but in the short term, the jump in borrowing costs will hit 2023 profits.
On the positive side, BCE expects total revenue and free cash flow to grow this year, supported by the strength of the mobile and internet business lines. As such, the drop in the share price might be overdone.
The board has increased the dividend by at least 5% in each of the past 15 years. Investors who buy at the current level can get a 7% dividend yield.
TC Energy
TC Energy (TSX:TRP) trades near $49 at the time of writing. The stock was above $70 in the summer of 2022. Energy infrastructure stocks have all pulled back over the past year for mostly the same reason the telecom stocks are out of favour.
Higher interest rates drive up borrowing costs and can make development projects less profitable. In the case of pipelines and power plants, the developments often cost billions of dollars and can take years to complete, so it can take a while for the revenue stream to start and pay for the capital investment.
TC Energy has a $34 billion capital program. Its Coastal GasLink project is now expected to cost at least $14.5 billion, which is more than double the initial budget. Fortunately, the project is more than 90% complete, so there shouldn’t be too much additional pain.
Despite the near-term challenges, TC Energy expects revenue and cash flow to increase enough to support annual dividend increases in the 3-5% range over the medium term. The board has increased the dividend annually for more than two decades.
Investors who buy TRP stock at the current price can get a 7.6% dividend yield.
The bottom line on top TSX dividend stocks
Ongoing volatility should be expected, but BCE and TC Energy already appear oversold and pay attractive dividends that should continue to grow. If you have some cash to put to work in a portfolio focused on passive income, these stocks deserve to be on your radar.
