Canadian retirees are getting hit hard by rising prices for essential goods and services. In order to offset the impact on their budgets, many are searching for ways to get better returns on their savings without being pushed into a higher marginal tax bracket.
Owning top TSX dividend stocks inside a Tax-Free Savings Account (TFSA) is one way to achieve the goal. The pullback in the share prices of several great Canadian dividend payers is driving up yields to attractive levels.
Telus
Telus (TSX: T) has increased its dividend annually for more than 20 years. The company often splits the yearly increase into two hikes, putting more money into shareholder pockets faster than if the increase occurs once per year.
Telus stock is down considerably over the past 12 months. At the time of writing, the shares trade for less than $23 compared to more than $34 at one point in 2022.
The drop is largely due to rising interest rates. Communications companies spend billions of dollars every year on network upgrades and other capital programs to ensure their customers have the access they need to high-speed broadband across mobile and wireline connections. Telus uses debt as part of its funding program, so higher borrowing costs can reduce profits and impact cash flow for distributions.
Telus is also seeing a slowdown in demand for services at its Telus International (TSX: TIXT) subsidiary. The group provides IT and multi-lingual customer care services to global clients.
Telus reduced its 2023 financial guidance due to the challenges at TIXT and is trimming staff by 6,000 to adjust. Despite the headwinds, the company still expects consolidated operating revenue to grow by at least 9.5% in 2023, supported by strength in the core mobile and internet subscription businesses.
At the current share price, investors can get a 6.4% dividend yield from Telus.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades under $63 per share at the time of writing compared to $93 in early 2022. As with Telus, the drop is largely due to soaring interest rates, although the impact on the business is different.
Banks often generate better net interest margins when interest rates move higher. This can offset the increase in defaults when rate hikes are modest or spaced out over a long period of time. The sharp increase in interest rates in the past 18 months, however, is putting borrowers with too much debt in a bad position. Bank of Nova Scotia and its peers have increased their provisions for credit losses (PCL) in the past couple of quarters to reflect the changing conditions in their lending portfolios. Investors should expect to see the trend continue.
That being said, Bank of Nova Scotia remains very profitable and has a good capital cushion to ride out some tough times. The board actually increased the dividend earlier this year, so the management team seems to be comfortable with the profit outlook. At the current level, the stock already appears to be priced for a downturn.
BNS stock provides a 6.75% dividend yield at the time of writing.
The bottom line on top stocks for passive income
Telus and Bank of Nova Scotia pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA targeting passive income, these stocks look cheap and deserve to be on your radar.
