BCE (TSX:BCE) and Enbridge (TSX:ENB) are two of Canada’s top dividend stocks that currently trade at discounted prices compared to their 12-month highs. Retirees and other investors seeking passive income are wondering if BCE stock or ENB stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on high-yield dividend stocks.
BCE
BCE (TSX:BCE) is Canada’s largest communications provider, with a current market capitalization of nearly $47 billion. The stock trades close to $51 at the time of writing. It was at $65 earlier this year and topped $73 in 2022.
The decline has surprised many long-term owners of the stock who see BCE as a solid holding in most economic conditions. A steep rise in interest rates is largely to blame for the pullback.
Higher rates make debt more expensive for BCE when it borrows funds to help finance its capital program. BCE spent roughly $5 billion in 2022 on projects that include its 5G network and the extension of fibre-optic lines to the premises of its customers. These projects should help drive revenue and profit growth in the coming years while supporting BCE’s competitive position in the market.
BCE is seeing weakness in its media business due to falling ad spending as businesses cut marketing budgets or shift funds to other alternatives. This led to a reduction in staff this year as BCE adjusts to the current market conditions.
Despite the headwinds, the company still expects revenue to grow in 2023, driven by strong performances in the mobile and internet businesses. This should support the dividend, which now provides a 7.5% yield.
BCE increased the distribution by at least 5% in each of the past 15 years.
Enbridge
Enbridge (TSX:ENB) operates oil pipelines, an oil export terminal, natural gas pipelines, natural gas utilities, and renewable energy assets. The company also has a stake in the Woodfibre liquified natural gas (LNG) facility being built in British Columbia and recently announced a US$14 billion acquisition of three natural gas utilities in the United States.
The addition of these new assets and the ongoing $17 billion capital program should deliver steady cash flow in the coming years to support the dividend. Enbridge raised its dividend in each of the past 28 years, so there is a solid track record in place.
At the time of writing, ENB stock trades for close to $44 per share compared to $59 at the high last year. Interest rates are to blame for most of the pain. As with BCE, Enbridge uses debt to fund its growth initiatives. Higher borrowing expenses can cut into profits and impact cash available for distributions.
Demand for oil and natural gas is expected to grow, even as the world transitions to renewable energy. Enbridge is in a good position to benefit.
Investors who buy ENB stock at the current level can get a yield of 8%.
Is one a better pick?
Enbridge has the higher yield today, so it would be more attractive for investors who are purely focused on passive income. That being said, both stocks appear oversold today and should continue to increase their distributions. BCE’s dividend growth in each of the past two years has been about 5% compared to 3% at Enbridge. As such, I would probably split a new investment between the two stocks at the current price levels.
