Sitting on Cash? These 2 Dividend Stocks Look Like Great Buys

These top dividend-growth stocks offer high yields and still look cheap.

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Canadian retirees and other investors who like dividend stocks are wondering which top TSX dividend payers are still undervalued after the recent rally. They might be good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on passive income or total returns.

Telus

Telus (TSX:T) is a major player in the Canadian communications sector, with wireless and wireline networks providing mobile, internet, and TV services to businesses and households across the country.

Telus trades below $24 per share at the time of writing compared to more than $34 at the high point in 2022.

The steady decline is largely due to aggressive interest rate hikes by the Bank of Canada over the past 18 months in its bid to tame inflation by cooling off the economy and loosening up the tight labour market. Inflation came in at 3.1% in November. That’s down from the 8% level it hit in the summer of 2022 but is still above the 2% target.

Higher interest rates drive up borrowing costs for companies like Telus that use debt as part of their funding strategy to pay for capital initiatives. The jump in debt expenses can put pressure on profits and reduce the cash that might be available for distributions to shareholders. With inflation heading in the right direction, economists expect the Bank of Canada to begin cutting interest rates in 2024. This should help Telus and could attract investors back to the stock.

Telus cut its staff count by about 6,000 in 2023 as part of its efforts to streamline the business and adjust to challenging conditions faced by its Telus International subsidiary. Investors might have focused too much on the international division, which only accounts for about 10% of overall earnings before interest, taxes, depreciation, and amortization (EBITDA). Telus reduced 2023 guidance in the summer but is still expected to deliver consolidated revenue growth near 10% in 2023 and adjusted EBITDA of about 7%.

Telus raised the dividend when it reported third-quarter (Q3) 2023 results. The board has increased the payout annually for more than two decades. Investors who buy the stock at the current level can get a 6.3% dividend yield.

Enbridge

Enbridge (TSX:ENB) is best known for its vast oil pipeline network that moves nearly a third of the oil produced in Canada and the United States and the natural gas transmission pipelines that carry about 20% of the natural gas used by American homes and businesses. In recent years, however, most of the new growth investment has focused on other segments. Enbridge purchased an oil export terminal in Texas and has a stake in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia. The company has also expanded its solar and wind assets and recently announced a US$14 billion deal to buy three natural gas utilities in the United States.

The overall business performed well in 2023, and management expects the $25 billion capital program and acquisitions to drive growth in revenue and distributable cash flow. Enbridge has increased the dividend for 29 years in a row. The stock currently offers a 7.5% dividend yield.

As with Telus, the pressure on Enbridge’s share price over the past year was mostly driven by hikes in interest rates. Any indication from the Bank of Canada that it will begin to reduce rates should provide support for ENB stock.

The bottom line on top stocks for dividends

Telus and Enbridge pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks look cheap today and deserve to be on your radar.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Enbridge, TELUS, and Telus International. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Telus and Enbridge.

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