The surge in interest rates in Canada has led to a steep pullback in the share prices of many great TSX dividend stocks. Contrarian investors seeking high yields and a shot at big capital gains are wondering which top Canadian dividend stocks might be oversold and good to buy before interest rates peak and start to fall.
BCE
BCE (TSX:BCE) is Canada’s largest communications firm with a current market capitalization near $48 billion. The stock trades for close to $52 per share at the time of writing compared to more than $70 at the high point last year.
The decline is largely due to the rapid rise in interest rates that has occurred as the Bank of Canada tries to cool off the economy to get inflation back down to the 2% target. Inflation for September came in at 3.8%, so rates will likely remain at current levels for the rest of the year or could even increase.
Higher interest rates drive up the cost of borrowing for BCE and other businesses that use debt as part of their funding strategy to finance capital projects. BCE spent about $5 billion last year on initiatives such as the 5G network and the continuation of its fibre-to-the-premises program. The jump in debt costs is expected to contribute to a 3% to 7% decline in adjusted earnings per share in 2023.
That being said, BCE says revenue growth should be 1% to 5% this year, and free cash flow growth is targeted at 2-10%, supported by strength in the core mobile and internet businesses.
BCE raised the dividend by at least 5% in each of the past 15 years. Investors who buy the stock at the current level can get a 7.4% dividend yield.
TC Energy
TC Energy (TSX:TRP) is a major player in the North American energy infrastructure sector, with more than 90,000 km of natural gas pipelines and 650 billion cubing feet of natural gas storage in Canada, the United States, and Mexico.
The company’s Coastal GasLink project is near completion. This is a relief for investors who have watched the cost of the pipeline more than double to at least $14.5 billion as a result of pandemic delays, difficult weather, and rising costs for supplies.
Despite the Coastal GasLink challenges, TC Energy still expects the overall $34 billion capital program to drive enough revenue and cash flow growth to support annual dividend increases in the 3-5% range. Shareholders have received an annual dividend increase for more than 20 years.
The company is monetizing some existing assets to shore up the balance sheet. TC Energy sold an interest in part of its American portfolio for $5.3 billion this year and plans to spin off the oil pipelines business.
TRP stock trades below $48 per share at the time of writing compared to $74 at the peak in 2022. Investors who buy at the current price can get a 7.8% dividend yield.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) has also been hit by rising interest rates, but in a different way. Banks actually benefit from higher rates due to the increased net interest margins they can often generate as rates move higher. The sharp spike in rates over such a short period of time, however, is putting pressure on borrowers who have too much debt.
Bank of Nova Scotia nearly doubled its provision for credit losses in fiscal third quarter (Q3) of 2023 compared to the same period last year. The trend could continue while interest rates remain high, but the overall loan book looks solid, and Bank of Nova Scotia continues to generate strong profits. Management has also done a good job of boosting the capital reserves to a level that should enable Bank of Nova Scotia to ride out market turbulence.
BNS stock trades for close to $60 per share at the time of writing compared to $93 at one point in early 2022. Investors can now get a 7% yield on the stock.
The bottom line on top TSX dividend stocks
BCE, TC Energy, and Bank of Nova Scotia pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks look cheap today and deserve to be on your radar. Near-term volatility should be expected, but the share prices could move meaningfully higher when interest rates start to decline.
