The steep decline in the share prices of some of Canada’s top dividend stocks is giving investors a great opportunity to earn high yields with a shot at decent capital gains inside a buy-and-hold Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Enbridge
Enbridge (TSX:ENB) recently surprised the market with its agreement to buy three American natural gas utilities for US$14 billion, including the assumption of debt. The move is the next step in management’s strategic shift from oil pipelines to a more diversified energy infrastructure player.
Enbridge isn’t new to the natural gas distribution segment. The company already owns large natural gas utilities in Canada and has a vast natural gas transmission network that moves 20% of the natural gas used in the United States. This puts Enbridge in a good position to capitalize on the anticipated transition to hydrogen in the coming decades.
Enbridge’s renewable energy business also continues to grow. The company purchased a solar and wind developer in the United States last year. Enbridge’s existing solar, wind, and geothermal assets are located in North America and Europe.
Oil pipelines are still important assets, and legacy infrastructure should be more valuable in the current era. Getting new large oil pipelines approved and built is very difficult these days, and that situation is unlikely to change in the coming years. Global demand for oil, meanwhile, is expected to rise, even as the world transitions to renewable energy. Enbridge purchased an oil export terminal in Texas in 2021 for $3 billion.
Exports of natural gas are also expected to rise. Enbridge is a partner in the Woodfibre liquified natural gas (LNG) export terminal being built in British Columbia.
ENB stock has been down over the past year, largely due to soaring interest rates. Higher rates make borrowing more expensive to fund capital projects. Rising rates also drive up the return investors can get from zero-risk alternatives, like Guaranteed Investment Certificates (GICs), making dividend stocks less appealing.
Enbridge’s shares currently trade near $45 compared to $56 in early 2023.
The decline looks overdone, considering the stable outlook for revenue and cash flow in the next few years, driven by the acquisitions and Enbridge’s capital program. Investors who buy the stock at the current level can get a 7.9% dividend yield. Enbridge raised the dividend in each of the past 28 years.
Telus
Telus (TSX:T) has increased its dividend annually for more than two decades and historically bumped up the payout twice per year. The stock is down considerably from the 2022 high around $34. At the time of writing, Telus trades for close to $22 per share.
As with Enbridge, the bulk of the decline is due to rising interest rates. Telus uses debt to help finance its capital initiatives. As borrowing costs increase, there is potentially less money to hand out to shareholders.
Telus is also getting hit by a slowdown in demand for the IT and multi-lingual customer care services offered by Telus International, a subsidiary that Telus took public in 2021.
Telus lowered its 2023 guidance as a result of the challenges at TIXT, but Telus still expects total consolidated operating revenue to grow by nearly 10% this year compared to 2022, supported by strength in the core mobile and internet businesses. Free cash flow will be lower than expected due to charges from cutting 6,000 staff positions this year, but dividend growth should still be on track, even if it comes in a bit lower than previous years.
At the time of writing, Telus provides a 6.6% dividend yield.
The bottom line on top TSX dividend stocks
Enbridge and Telus pay 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 for a buy-and-hold dividend portfolio.
