BCE (TSX:BCE) and TC Energy (TSX:TRP) now offer dividend yields above 7%. Retirees and other investors seeking passive income are wondering if BCE stock or TRP stock is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) portfolio.
BCE
BCE trades for close to $53 at the time of writing compared to $65 earlier this year and $74 at one point in 2022.
The steep decline over the past six months is largely due to rising interest rates. As rates move higher the return investors get on no-risk investments, like Guaranteed Investment Certificates (GICs) also goes up. Stock prices of popular dividend payers that normally attract income investors have fallen as a result of the competition for funds. Investors always want a premium on the return from higher-risk investments, so this is one reason BCE’s share price has pulled back.
Higher interest rates also drive up borrowing costs. BCE uses debt to fund part of its large capital program. The added interest expenses are putting a dent in profits and can reduce cash available for dividends. In fact, BCE expects earnings per share to slip by 3-7% this year in part due to higher debt costs.
On the positive side, BCE’s core mobile and internet businesses are performing well and the company recently confirmed guidance for revenue and free cash flow growth in 2023 compared to last year. This should support the dividend heading into 2024.
BCE increased the dividend by at least 5% in each of the past 15 years. Investors who buy the stock at the current price can get a 7.3% dividend yield.
TC Energy
TC Energy just reached mechanical completion of its 670 km Coastal GasLink pipeline that will transport natural gas from Canadian producers to a new liquified natural gas (LNG) export facility being built on the coast of British Columbia. The project ran into several issues over the past few years. Pandemic delays, bad weather, soaring material prices, and disputes with contractors combined to drive up costs to an estimated $14.5 billion, more than double the original budget.
As a result, TC Energy has spent much of 2023 looking for ways to raise additional cash to cover the hit and shore up the balance sheet as it looks to complete the rest of the capital program across the portfolio. Management already secured $5.3 billion from the sale of an interest in some U.S. assets. The company is also planning to spin off the oil pipelines group and might monetize assets in Mexico.
TRP stock trades for close to $49.50 at the time of writing compared to more than $70 at the high point last year. At the current price, investors can get a 7.5% dividend yield.
Despite the challenges faced by the company in the past couple of years, management still expects the ongoing asset growth to support planned annual dividend increases of 3% to 5% over the medium term. TC Energy has increased the dividend annually for more than two decades.
Is one a better pick?
BCE and TC Energy pay attractive dividends that should continue to grow. Both stocks look cheap today and deserve to be on your radar for a portfolio targeting passive income.
If you only buy one, I would probably make TRP the first choice right now for the slightly higher yield. The energy infrastructure stock likely also has more upside torque on a rebound.
