The drop in bond yields in recent weeks has led to a rebound in the share prices of high-yield Canadian dividend stocks. Investors who missed the bounce are wondering which top TSX dividend stocks are still undervalued and good to buy for a self-directed Registered Retirement Savings Plan (RRSP) portfolio.
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Enbridge
Enbridge (TSX:ENB) trades near $47.50 at the time of writing compared to $43 in early October, but the stock is still down considerably from the $59 it reached at one point in 2022.
The drop over the past two years is primarily due to the impact of rising interest rates. Safer investments now offer good returns that can compete with dividend stocks for funds. At the same time, higher borrowing costs can hurt corporate profits.
Yield investors often shift funds to low-risk alternatives when interest rates increase. Higher bond yields and elevated rates on Guaranteed Investment Certificates (GICs) can trigger an increase in the risk premium investors demand for owning dividend stocks. As a result, share prices pull back to the point where the increased dividend yield attracts income investors.
Rising interest rates also bump up borrowing costs. Enbridge uses debt as part of its funding for growth initiatives, so a jump in rates eats up cash that could otherwise be available for dividends. Elevated debt expenses also reduce profits.
Despite these headwinds, the stock still looks oversold. Enbridge’s assets have performed well this year, and management just announced a 3.1% dividend increase for 2024. This extends the dividend-growth streak to 29 consecutive years.
Enbridge expects the capital program and revenue gains from acquisitions to boost distributable cash flow next year. At the time of writing, Enbridge provides a 7.7% dividend yield.
If interest rates start to decline in 2024, as is anticipated by many economists, ENB stock should extend its recovery.
BCE
BCE (TSX:BCE) trades for close to $55 at the time of writing compared to $65 in May. The drop looks overdone, considering the essential nature of the core mobile and internet subscription businesses. Households and companies need communication services, regardless of the state of the economy.
That being said, BCE’s media division is facing challenges as customers reduce ad spending on radio and television. The digital platforms are bucking the trend, but the strength in the digital segment of the group is not covering the dip in the traditional media ad sales. These issues could persist in 2024 if the economy weakens. However, the impact on the overall business is relatively small.
BCE expects total revenue and free cash flow to rise in 2023 compared to last year, driven by the strong mobile and internet divisions. This should provide support for the dividend in 2024. BCE has increased the payout by at least 5% in each of the past 15 years.
The bottom line on top dividend stocks for RRSP investors
Enbridge and BCE pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed RRSP focused on high yield, these stocks still look cheap and deserve to be on your radar.
