The latest leg of the market correction is giving dividend investors a chance to buy great Canadian dividend stocks at discounted prices for a self-directed Tax-Free Savings Account (TFSA) focused on passive income and total returns.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) trades near $62 per share at the time of writing compared to $92 in early 2022.
The significant pullback is largely due to the sharp rise in interest rates in Canada and the United States over the past 18 months, as the Bank of Canada and the U.S. Federal Reserve try to reduce inflation by cooling off the economy and loosening up the tight labour market.
Rising interest rates can boost net income margins for the banks, but the drastic move over such a short period of time is putting pressure on borrowers. Bank of Nova Scotia nearly doubled its provision for credit losses (PCL) to $819 million in the fiscal third quarter (Q3) 2023 compared to the same period last year. All the big banks are setting more cash aside to cover potential bad loans.
The number sounds large, but it is small relative to the size of the total loan portfolio, and the overall loan book remains in good shape. Bank of Nova Scotia continues to generate good profits and has built up a solid capital position to ride out the current turbulence. The board increased the dividend earlier this year. That should be a sign to investors that management is comfortable with the earnings outlook.
Bank of Nova Scotia has underperformed its Canadian peers in recent years, so the stock is a bit of a contrarian pick in the segment. A new chief executive officer took control in 2023 and is working hard to deliver better returns for investors.
At the time of writing, BNS stock provides a 6.8% dividend yield, so investors get paid well to wait for the rebound.
Fortis
Fortis (TSX:FTS) is a utility firm with $64 billion in assets spread out across Canada, the United States, and the Caribbean. The company gets 99% of its revenue from rate-regulated businesses. These include power stations, electricity transmission networks, and natural gas distribution utilities. Regardless of the state of the economy, households and businesses need electricity and natural gas. As a result, Fortis should be a good stock to own during a recession.
The company grows through development projects and acquisitions. Fortis is working on a $22.3 billion capital program that will raise the rate base by about 35% over five years. The resulting increase in cash flow should support planned annual dividend increases of 4-6% through 2027. Fortis bumped up the dividend in each of the past 49 years.
The stock currently trades near $51 compared to more than $60 in May. Investors can get a 4.6% yield right now and wait for the dividend increases to boost the return. Buying Fortis on big pullbacks has historically proven to be a savvy move for patient investors.
The bottom line on top stocks for passive income
Ongoing volatility should be expected, and more downside could be on the way. That being said, Bank of Nova Scotia and Fortis already look cheap 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.
