Retirees and other dividend investors are wondering which top TSX dividend stocks with high yields are still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on passive income or a Registered Retirement Savings Plan (RRSP) targeting total returns.
BCE
BCE (TSX:BCE) is Canada’s largest communications company with a current market capitalization of $47 billion. The stock trades near $51.50 at the time of writing. It has been on a bit of a bumpy ride over the past six months, falling from $65 in May to below $50 in early October. A short rally sent the share price back up to $55 before the latest pullback.
Soaring interest rates are largely to blame for the decline from the spring highs. The Bank of Canada raised interest rates aggressively in a bid to cool off the economy and get inflation under control. BCE uses debt to finance part of its growth program, which includes building out the 5G mobile network and expanding the reach of its fibre optic lines. Higher borrowing costs eat into profits, and BCE is expected to report lower 2023 earnings per share than it did in 2022.
That being said, the drop in the share price is likely overdone. Interest rates are expected to decline at some point in 2024. BCE’s core mobile and internet businesses are performing well in challenging economic conditions and should continue to deliver steady revenue streams even if the economy slips into a recession. BCE actually expects revenue and free cash flow to be higher in 2023 compared to last year. This should support the dividend heading into 2024.
BCE has increased the dividend by at least 5% annually for the past 15 years. Investors who buy BCE stock at the current level can get a 7.5% dividend yield.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) plans to focus on growth in Canada, the United States, and Mexico in the coming years while reducing investments in other markets.
The company spent billions over the past decade building up its international operations in Chile, Peru, and Columbia. These members of the Pacific Alliance trade bloc, which also includes Mexico, arguably offer good long-term growth potential as the middle class expands, but political and macroeconomic uncertainty is a constant concern, and investors have not seen the anticipated benefits emerge from the large investments in these countries. At the recent investor meeting, Bank of Nova Scotia said it would try to turn the South American operations around without investing much more money. An exit is also possible in one or more of the markets.
Bank of Nova Scotia took heavy charges in the fiscal fourth-quarter (Q4) and set aside more cash for potential loan losses than analysts expected. The decision was likely a case of getting rid of all the problems on the balance sheet in one swoop to start fiscal 2024 with a clean slate.
The new chief executive officer, who took control in early 2023, has already put new people in many senior roles and trimmed staff by 3% this year. Investors could see restructuring efforts continue through next year. The long-term prospects, however, should be positive for the bank.
Bank of Nova Scotia remains very profitable and has a solid capital cushion to ride out market turbulence. The board raised the dividend in 2023, despite the challenging conditions, and investors should be comfortable with the safety of the payout.
Economists broadly expect the Bank of Canada and the U.S. Federal Reserve to cut interest rates at some point in 2024. This will ease pressure on businesses and households and should help navigate a soft landing for the economy. At its current level, BNS stock appears priced for hard economic times.
Bank of Nova Scotia is arguably a contrarian pick today, but investors who buy now can get a 6.8% dividend yield and simply wait for the recovery.
The bottom line on top stocks for high dividend yields
BCE and Bank of Nova Scotia pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA or RRSP targeting high yields, these stocks still look cheap and deserve to be on your radar.
