Top TSX dividend stocks are taking a beating, as rising interest rates make fixed-income alternatives more competitive for investor funds. Higher rates are also driving up risks of a recession. Ongoing volatility should be expected in the near term, but there is big upside potential on the next rebound.
Contrarian investors with a buy-and-hold strategy now have an opportunity to buy leading Canadian dividend stocks at cheap prices for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Enbridge
Enbridge (TSX:ENB) is widely known for being an operator of oil pipelines, but the company has shifted its growth strategy in recent years to diversify the asset base and broaden the revenue stream. Enbridge’s latest move is a deal to buy three natural gas utilities in the United States for US$14 billion. The acquisitions will combine with the Canadian gas utility assets to make Enbridge the largest natural gas utility operator in North America.
Enbridge also sees good growth potential for exports and renewable energy. The company spent US$3 billion to buy an oil export terminal in Texas in 2021 and has a stake in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia. Last year, Enbridge acquired the third-largest U.S. developer of wind and solar projects.
ENB stock trades near $44 per share at the time of writing compared to $59 at the high point in 2022.
Rising interest rates in Canada and the United States are largely responsible for the decline. The jump in borrowing costs can put a dent in profits and reduce cash available for distributions.
That being said, Enbridge has a $17 billion capital program that will combine with the acquisition assets to support revenue growth. Enbridge increased the dividend in each of the past 28 years. At the time of writing, Enbridge stock provides a yield of 8%.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) increased its dividend earlier this year on the back of continued strong profits, despite the economic headwinds caused by rising interest rates. In the case of the banks, higher rates often result in better profits due to the boost in net interest margins. In the past year, however, the sharp increase in interest rates over a short period is putting borrowers with too much debt in a difficult position.
Bank of Nova Scotia nearly doubled its year-over-year provision for credit losses (PCL) when it reported fiscal third-quarter (Q3) 2023 results. The trend is expected to continue, as rates stay elevated and more fixed-rate loans come due for renewal.
The overall loan book, however, remains in solid shape, and Bank of Nova Scotia has done a good job over the past year of building up its capital reserves to buffer the business against a potential recession. At the current share price below $60, the stock appears to be priced for a deep downturn. Economists widely expect a recession to be short and mild as the Bank of Canada and the United States Federal Reserve work to reduce inflation to their 2% target.
Investors who buy BNS stock now can get a 7.1% dividend yield.
The bottom line on top high-yield stocks
Enbridge 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 or RRSP, these stocks look cheap right now and deserve to be on your radar.
