The recent rally in the share prices of some top Canadian dividend stocks caught many investors off guard. Those with cash to put to work are wondering which TSX dividend stocks still look undervalued and are good to buy for a self-directed retirement portfolio.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) trades for close to $62.75 at the time of writing. The share price is up more than 13% since late October but is still way down from the $93 the stock reached in early 2022 after the post-pandemic rally.
The board brought in a new chief executive officer in 2023, who has already announced a 3% staff reduction to cut expenses and has overhauled the senior ranks amid a strategy shift that will see the bank focus more on growing its businesses in Canada, the United States, and Mexico. Less emphasis and limited new funding will go to the international operations in Colombia, Peru, and Chile, where heavy investments over the past decade have yet to deliver the expected benefits for shareholders.
Bank of Nova Scotia remains very profitable, and the dividend should be safe. It might take some time for the new strategy initiatives to show up in the results, but investors who buy BNS stock at the current level can get a solid 6.75% dividend yield while they wait for the rebound.
TC Energy
TC Energy (TSX:TRP) traded as high as $74 in June of 2022. The stock then went into a prolonged slide that saw it eventually drop to $45 in early October of 2023. Over the past three months, however, bargain hunters have jumped into position for a rebound. At the time of writing, TRP stock still looks cheap, trading near $52.50, and offers a 7% yield.
The rally has occurred in step with the rebound in the bond market that is due to anticipated rate cuts in the United States and Canada this year. High inflation forced the Bank of Canada and the U.S. Federal Reserve to boost interest rates aggressively over the past 18 months. This is the strategy the central banks are using to cool off the economy and loosen up a tight jobs market to reduce upward pressure on prices.
Higher borrowing costs can impact profits for businesses like TC Energy that use debt to fund large capital programs. As rates decline, there should be new interest in the stock.
Inflation is down to about 3%, which is still above the 2% target level, but rate hikes take time to work their way through the economy, and expectations are that the downward trend will continue. In fact, some pundits speculate the central banks will have to start cutting rates as early as this spring to avoid pushing the economy into a serious recession.
The drop in TC Energy’s share price appears overdone when you consider the solid performance of the overall business last year. Management expects to report growth in earnings before interest, taxes, depreciation, and amortization (EBITDA) near the top end of the 2023 guidance.
Looking ahead, the challenges faced by the Coastal GasLink project have been overcome, and the project reached mechanical completion late last year. TC Energy raised $5.3 billion in funds to reduce debt in 2023 and will continue to shore up the balance sheet in 2024.
Dividend growth is expected to trend around 3% per year over the medium term. TC Energy has increased the payout annually for more than 20 years.
The bottom line on cheap TSX dividend stocks
Bank of Nova Scotia and TC Energy pay attractive dividends that should continue to grow. If you have some cash to put to work in a portfolio targeting high dividend yields, these stocks deserve to be on your radar.
