Canadian pensioners are searching for ways to get better returns on their savings to help offset the constant increase in living expenses. One popular strategy for boosting passive income involves holding top TSX dividend stocks inside a Tax-Free Savings Account (TFSA).
The pullback in the share prices of many dividend-growth stocks in 2023 is giving investors a chance to secure high yields and set themselves up for a shot at decent capital gains on a rebound.
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TC Energy
TC Energy (TSX:TRP) is a major player in the North American energy infrastructure industry. The company operates more than 93,000 km of natural gas pipelines, 650 billion cubic feet of natural gas storage capacity, oil pipelines, and power-generation facilities in Canada, the United States, and Mexico.
The stock hit $74 at one point in 2022, but the slide in oil prices through the back half of last year and the surge in interest rates in Canada and the United States sent pipeline stocks into a decline. TC Energy has also struggled with rising costs on a major project over the past two years. At the time of writing, the stock trades near $52.50. That’s up from $45 in early October but still off the 2022 peak.
The recent bounce is largely due to expected cuts in interest rates next year. The Bank of Canada and the U.S. Federal Reserve are making progress in their efforts to reduce inflation and might start trimming interest rates in 2024 to avoid causing a deep recession. TC Energy uses debt to fund part of its growth program, so lower borrowing costs should improve earnings and make more cash available for distributions.
TC Energy has done a good job of shoring up the balance sheet in 2023, and more progress is likely on the way. The company intends to spin off the oil pipelines business next year and will look to monetize other non-core assets to help fund the rest of the capital program.
TC Energy’s overall business is performing well with adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) expected to be about 8% higher in 2023. Management plans to deliver annual dividend growth of at least 3% over the medium term. At the current share price, investors can get a 7% dividend yield from TRP stock.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is Canada’s fourth-largest bank, with a current market capitalization near $76 billion. The stock trades close to $63 at the time of writing compared to $93 in early 2022 but is off the 2023 lows around $55 reached in late October.
High interest rates are to blame for most of the pain at Canadian bank stocks over the past two years. Investors are worried that the central banks have been too aggressive in their efforts to get inflation under control. Rate hikes take time to work their way through the economy, and the full impact is still unknown. Banks are already setting aside more money to cover potential bad loans as businesses and households struggle with a double hit from high inflation and rising debt costs.
That being said, the overall loan book looks solid, and Bank of Nova Scotia remains a very profitable business. The new chief executive officer is determined to drive better shareholder returns in the next few years. BNS stock has underperformed its peers, so this is a bit of a contrarian pick, but investors get paid well to wait for the recovery. At the time of writing, BNS stock provides a 6.7% dividend yield.
The bottom line on top stocks for passive income
TC Energy 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 focused on passive income, these stocks still look cheap and deserve to be on your radar for 2024.
