The latest leg of the market correction is giving Canadian investors another chance to buy top TSX dividend stocks at discounted prices for a self-directed Registered Retirement Savings Plan (RRSP) portfolio targeting total returns.
Buying stocks when they are out of favour requires some patience. Cheap stocks can get cheaper before they bounce. However, the contrarian strategy can boost long-term results by harnessing higher dividend yields and benefitting from capital gains when the market recovers.
CIBC (TSX:CM) trades for close to $51 per share at the time of writing. That’s close to the 12-month low and way down from more than $80 at the peak in 2022.
The decline has come as a result of the rise in interest rates in Canada and the United States over the past two years. High inflation forced the Bank of Canada and the U.S. Federal Reserve to act aggressively to try to cool off the economy and bring the labour market back into balance. Inflation in Canada dropped from 8% at the high point in 2022 to 4% in August, but there is work to do before it gets down to the 2% target.
High interest rates usually help banks by boosting net interest margins, but the steep increase over such a short time is making life difficult for borrowers with too much debt. Companies and households that binged on cheap loan rates are being forced to pay a lot more than they had anticipated. Each increase in interest rates has an immediate impact on variable-rate borrowers. Fixed-rate loans are protected until they mature, but most fixed-rate mortgages in Canada are for five years or less.
CIBC and its peers are already raising their provisions for credit losses (PCL). The trend is expected to continue as long as rates remain at elevated levels.
That being said, the pullback in CM stock likely already has the shares priced for a meaningful economic downturn. For the moment, the consensus expectation among economists appears to be for a short and mild recession in Canada and the United States as the central banks fight to get inflation under control. The housing market is holding up well due to low supply and robust demand, even at higher borrowing costs.
CIBC remains very profitable and has a decent capital cushion to ride out a downturn. The board increased the dividend earlier this year, so there doesn’t seem to be too much concern about the profit outlook. Investors who buy CM stock at the current level can get a 6.8% dividend yield.
Enbridge (TSX:ENB) recently announced a US$14 billion deal to buy three natural gas utilities in the United States. The company’s natural gas transmission infrastructure already moves 20% of the natural gas used by Americans, so the purchases put Enbridge in a good position to benefit from the anticipated transition to hydrogen as a fuel supplied through natural gas infrastructure.
Enbridge already has natural gas utilities in Canada that serve millions of customers. The combination of these assets with the new ones south of the border will make Enbridge the largest natural gas utility in North America. Utility businesses generate reliable rate-regulated revenue streams that should be steady, regardless of the state of the economy.
Enbridge’s oil pipeline assets remain important, along with the export facilities and the growing renewable energy portfolio.
The new assets, along with a robust capital program, should drive revenue and cash flow growth to support the dividend. Enbridge increased the payout in each of the past 28 years. The stock is down to about $44 from $59 last year. At the current level, investors can get a dividend yield of 8%.
The bottom line on top dividend stocks
CIBC and Enbridge pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed RRSP, these stocks look oversold today and deserve to be on your radar.