The market correction that is hitting Top Canadian dividend stocks is driving up yields to levels not seen since the volatile months of the 2020 market crash. Investors with a contrarian investing style now have another chance to buy some great TSX dividend stocks at discounted prices for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
BCE
BCE (TSX:BCE) trades near $52.50 at the time of writing. The stock was $65 in May and topped out around $74 in 2022.
The steep decline in recent months is largely due to renewed rate hikes by the Bank of Canada, as it continues to battle high inflation. Higher interest rates drive up debt costs for companies and households. This tends to reduce business investment and takes a bite out of consumer spending on non-essential goods and services. As the economy cools down, there should be a reduction in price increases, and demands for higher wages should subside as unemployment rises. Inflation came in at 4% for August, which is still well above the 2% target, so rates could remain elevated for some time or even move higher in the coming months.
BCE uses debt as part of its funding strategy for its capital projects. The jump in borrowing costs is expected to result in a drop in profits in 2023. However, BCE’s core mobile and internet businesses are performing well, and management expects total revenue to grow by 1-5% this year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth is targeted at 2-5%, and free cash flow is projected to rise by 2-10%.
This should support another dividend increase for 2024. BCE has raised the payout by at least 5% in each of the past 15 years. Investors who buy BCE stock at the current level can get a 7.3% dividend yield.
TC Energy
TC Energy (TSX:TRP) trades near $48.50 per share at the time of writing compared to more than $70 last year. The main reason for the drop is similar to the story at BCE. Energy infrastructure companies like TC Energy have large capital programs. Pipeline projects can take years to build before they go into operation and start generating revenue. Debt is used to fund some of the development costs, so higher interest rates can reduce profitability or even force potential projects to be shelved.
TC Energy has a $34 billion capital program. Its Coastal GasLink project is now expected to cost $14.5 billion, which is more than double the original budget. Fortunately, the pipeline is more than 90% complete, and management still expects the overall asset growth to boost cash flow enough to support ongoing annual dividend increases in the 3-5% range. TC Energy has increased the payout every year for more than two decades.
Investors who buy TRP stock at the current level can get a 7.7% dividend yield.
The bottom line on high-yield TSX stocks
BCE and TC Energy pay attractive dividends that should continue to grow. If you have a contrarian investing style and are searching for high-yield stocks to put in a TFSA or RRSP, these two deserve to be on your radar.
