The market correction in certain sectors of the TSX is giving retirees an opportunity to buy great Canadian dividend stocks at cheap prices for a self-directed Tax-Free Savings Account (TFSA) focused on passive income.
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BCE
BCE (TSX:BCE) is Canada’s largest communications company with wireless and wireline network infrastructure, providing essential mobile and internet services to corporate and residential customers across the country.
BCE also has a large media division that is home to a television network, specialty channels, radio stations, digital platforms, and interests in sports teams. The media businesses, aside from the digital assets, are struggling with a decline in ad spending. Clients are either cutting marketing budgets to protect cash flow or switching from radio and TV to alternative options, such as social media. The headwinds in the media group could continue for some time, and BCE announced job cuts this year in the range of 1,300 positions to adjust to the current environment.
At the same time, high interest rates are driving up borrowing costs for BCE. The company spends billions of dollars every year on capital projects and uses debt as part of the funding strategy. Adjusted earnings per share are expected to dip in 2023, partly due to the jump in debt costs.
Despite the challenges, BCE still expects operating revenue and free cash flow to grow in 2023, supported by the strength of the mobile and internet businesses. As such, the steep decline in the share price might be overdone.
BCE trades near $51 per share at the time of writing compared to $65 earlier this year and $74 at one point in 2022. Investors who buy at the current price can pick up a 7.6% dividend yield.
BCE increased the dividend by at least 5% in each of the past 15 years.
CIBC
CIBC (TSX:CM) also trades for close to $51 at the time of writing. The stock was above $82 at the high point last year.
Bank stocks have been hit as a result of the steep increase in interest rates in the past 18 months. Normally, higher interest rates are positive for banks, as the rise in rates enables the banks to generate better net interest margins. The dramatic increase in rates in Canada and the United States over such a short time, however, is putting pressure on borrowers who are carrying too much debt.
Homeowners in Canada with fixed-rate mortgages have to renew at much higher rates, and those with variable-rate loans have seen their payments jump or are being forced to extend their amortizations. The longer rates remain elevated, the higher the risk that there could be a wave of defaults, especially if the economy goes into a severe slump and unemployment surges.
CIBC has a large exposure to the Canadian residential market relative to its size, so investors might be concerned that the bank would take a big hit if things get ugly in the property market. That is certainly possible, but the drop in the share price appears to be exaggerated in current market conditions. CIBC remains a very profitable company and even increased its dividend earlier this year. The bank has a solid capital cushion to ride out tough times, so the distribution should be safe.
Economists broadly expect the economy to go through a soft landing, as the Bank of Canada holds rates high to get inflation under control. Rate cuts could begin next year, which would help reduce the risks of widespread loan defaults. If a mild and short recession is on the way, rather than a deep economic downturn, CIBC looks oversold right now.
Investors who buy CIBC stock at the current level can get a dividend yield of 6.8%.
The bottom line on top dividend stocks for passive income
BCE and CIBC pay attractive dividends that should continue to grow. Ongoing volatility is possible in the near term, but these stocks already look cheap and deserve to be on your radar for a portfolio focused on passive income.
