The latest leg of the market correction in dividend stocks is giving investors an opportunity to buy top TSX dividend payers at cheap prices for their self-directed Tax-Free Savings Account (TFSA) portfolios targeting passive income.
Investors don’t often get a chance to pick up a dividend yield of 7.6% from a stock that has increased the payout annually for 28 years. Right now, that’s the case with Enbridge (TSX:ENB). The stock trades near $46.50 at the time of writing compared to $59 at the high point in 2022.
The pullback is primarily due to soaring interest rates. As the Bank of Canada and the U.S. Federal Reserve raise rates, the cost of borrowing trends higher. Enbridge uses debt as part of its funding strategy, so the higher borrowing costs can have an impact on profits.
Dividend investors in Canada might also have sold the stock and shifted funds into Guaranteed Investment Certificates (GICs) that now offer yields above 5% for longer terms. Rates might go a bit higher and stay elevated for longer than the market initially expected, but the end of the cycle should be on the horizon.
As soon as rates begin to fall again, investors could flood back into ENB stock.
Enbridge continues to make investments to grow revenue and cash flow. The company recently announced a US$14 billion deal to buy three natural gas utilities in the United States. This will diversify the asset base and provide more predictability to cash flow. Enbridge is known for its oil pipelines, but it also has natural gas transmission networks, natural gas utilities in Canada, and renewable energy assets.
CIBC (TSX:CM) trades near $54 per share at the time of writing. That’s close to the 12-month low of around $53 and way down from the $83 the stock fetched in early 2022. The decline is primarily due to increasing investor concerns that the Bank of Canada’s steep interest rate increases over the past 18 months might turn out to be too aggressive in its battle to get inflation under control. Canada’s central bank is increasing interest rates to cool off the economy and bring balance to the jobs market. Rate hikes typically take 12-18 months to fully impact the economy, so there is a risk that a recession could occur that is deeper and longer than anticipated.
CIBC and its peers are already increasing provisions for credit losses (PCL) as they assess the impact of higher debt payments on commercial and retail customers who are carrying too much debt. There will be a rise in defaults, as businesses and over-leveraged households burn through savings. In the worst-case scenario, a big jump in unemployment could trigger a wave of mortgage defaults.
CIBC has a higher relative exposure to the Canadian residential housing market than its larger peers. If house prices collapse, CIBC would likely take a bigger hit.
For the moment, economists broadly expect the economy to go through a short and mild recession, if one occurs. Some analysts are also predicting rate cuts in 2024. This would help reduce defaults. If a soft landing turns out to be the way things materialize, CIBC stock is likely oversold today.
The bank remains very profitable and has a solid capital cushion to weather a downturn. Management increased the dividend earlier this year. That should be a signal that the company isn’t overly concerned about the health of the loan portfolio.
Investors can now get a 6.4% dividend yield from CM stock.
The bottom line on top stocks for passive income
Enbridge and CIBC are good examples of stocks that might be oversold right now and pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA, these stocks deserve to be on your radar.