The big pullback in the share prices of some of Canada’s top dividend stocks is giving investors who missed the rally off the 2020 market crash another chance to buy great dividend payers at discounted prices for a self-directed Registered Retirement Savings Plan (RRSP) portfolio.
Buying stocks on dips requires the courage and patience to ride out potential additional turmoil. However, top dividend-growth stocks normally bounce back and buying the dips can boost yields and long-term total returns.
Royal Bank (TSX:RY) is Canada’s largest financial institution and the biggest company on the TSX, with a current market capitalization of about $155 billion. RY stock trades near $110 per share at the time of writing compared to $140 earlier this year.
High interest rates are to blame for the pullback. The Bank of Canada and the United States Federal Reserve are raising interest rates to cool off the economy in an effort to get inflation back down to 2%. Markets appear to be concerned that the central banks have pushed rates too high and will trigger a deep economic downturn. If that happens, banks could get hammered by a wave of commercial and retail loan defaults. Businesses and households with too much debt will eventually run out of savings as they struggle to cover the increase in debt costs. Many might have to liquidate assets or file for bankruptcy.
Near-term volatility should be expected until the market knows rates won’t go higher. for the moment, economists widely expect a short and mild recession to occur, rather than an economic meltdown. If they are correct, Royal Bank stock is probably oversold today.
Royal Bank remains very profitable. The bank generated $4 billion in adjusted earnings in the fiscal third quarter (Q3) 2023. Return on equity remains high, and Royal Bank has a solid capital cushion to ride out some tough times.
The board increased the dividend earlier this year. At the current share price, investors can get a 4.9% dividend yield.
Enbridge (TSX:ENB) trades for close to $44 at the time of writing. The stock was as high as $59 last year. High interest rates are, again, largely to blame. Enbridge uses debt to fund part of its capital program and to make acquisitions. The jump in interest rates is driving up borrowing costs. This can put a dent in profits and reduce cash available for distributions.
On the operational side, however, the situation looks positive. Enbridge is a major player in the oil and natural gas transmission sectors, with pipelines that move 30% of the oil produced in the U.S. and Canada and 20% of the natural gas used in the United States. Demand for the fuels is expected to remain robust, even as the world transitions to renewable energy.
Enbridge also has export facilities, a growing solar and wind portfolio, and natural gas utilities. The balanced revenue stream should support the dividend in the coming years. Enbridge increased has increased the dividend annually for almost three decades. At the current share price, investors can get a yield of 8%.
The bottom line on top RRSP stocks
Royal Bank and Enbridge are leaders in their respective industries and 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 cheap today and deserve to be on your radar.