Rising interest rates over the past year have triggered a plunge in the share prices of many top TSX dividend stocks. Investors who missed the rally off the crash in 2020 now have another opportunity to buy great Canadian dividend stocks at discounted prices to get high yields for a self-directed Tax-Free Savings Account (TFSA) focused on generating passive income.
Enbridge
Enbridge (TSX:ENB) recently surprised the market with the announcement of a major acquisition at a time when many companies are avoiding big deals due to the high cost of financing and the uncertain outlook for the economy. The U.S. Federal Reserve and the Bank of Canada are driving interest rates higher to slow down the economy and ideally get inflation back to their 2% target.
Enbridge is buying three natural gas utilities in the United States for US$14 billion. The company announced a share issue at a discount to the previous closing price at the same time to raise $4.6 billion in funds to help pay for part of the deals. Enbridge stock initially fell 6% on the news to its lowest point in two years but has recovered most of the post-deal drop in recent days. Despite the tailwind, Enbridge is still way down from the 2022 high.
At the time of writing, Enbridge trades near $47.50. The stock was at $59 in June last year. Most of the pullback is due to the surge in interest rates.
Higher rates drive up borrowing costs. This can impact profits for companies like Enbridge that have large capital programs and use debt as part of their funding strategy. Energy infrastructure projects can take months or even years to build before they start to generate revenue. Debt payments have to be made on the funds the company borrows to get the developments completed.
The long-term impact of the acquisitions should be beneficial for investors. Adding the three American utilities will bring more balance to the overall asset portfolio that is currently overweight oil pipelines. The natural gas utilities generate steady rate-regulated cash flow and put Enbridge in a good position to benefit when the anticipated transition to hydrogen occurs.
Enbridge increased the dividend in each of the past 28 years. Investors who buy ENB stock at the current level can get a 7.5% dividend yield.
CIBC
CIBC (TSX:CM) is the smallest of the Big Five Canadian banks, with a current market capitalization of about $50 billion. The bank is widely perceived as being a riskier pick than its peers. Part of this is due to CIBC’s history of making big blunders, including billions in writedowns taken during the Great Recession due to bad subprime mortgage bets in the United States.
In the past decade, CIBC shifted its focus to the Canadian housing market, which has been a very profitable move. However, the bank’s exposure to the Canadian residential market is now larger than most of its peers on a relative basis. This might be why investors have driven down the share price more than the other large Canadian banks over the past year.
At the time of writing, CIBC trades near $55.50 per share. The stock was above $80 in early 2022.
In the event interest rates continue to rise and stay elevated for too long, there could be trouble in the housing market, especially if unemployment surges before rates start to decline. In a scenario where house prices plunge as a result of a wave of listings and loan defaults, CIBC would likely take a larger hit than the other big Canadian banks.
That being said, high immigration levels should put a floor under any downside. Economists currently expect rate hikes to cause a short and mild recession rather than a deep economic contraction. In this situation, CIBC stock arguably appears oversold.
The board increased the dividend when the bank reported the fiscal second-quarter 2023 results, so there doesn’t seem to be much concern in the executive ranks about the earnings outlook. CIBC remains very profitable and has built up a solid capital cushion to ride out some turbulence.
At the time of writing, CM stock provides a 6.25% dividend yield.
The bottom line on top TSX stocks for high yields
Enbridge and CIBC are good examples of top Canadian stocks with attractive dividends that should continue to grow. If you have some cash to put to work, these stocks look cheap today and deserve to be on your radar.
