Canadian investors with a contrarian strategy are looking for top TSX dividend stocks that might still be undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio. TC Energy (TSX:TRP) and Telus (TSX:T) are good examples of great dividend stocks that trade well below their highs reached in the past couple of years.
Buying stocks when they are out of favour takes courage and the patience to ride out additional turbulence, but the rewards can be significant when sentiment shifts.
TC Energy
TC Energy is a major player in the North American energy infrastructure industry, with more than 93,000 km of natural gas pipelines and 650 billion cubic feet of natural gas storage capacity located across Canada, the United States, and Mexico.
The stock has been on a downward slide for most of the past 18 months. This is primarily due to the impact of rising interest rates in Canada and the United States, although TC Energy also had some issues with a large pipeline project.
Rising interest rates have driven up borrowing costs for firms like TC Energy that use debt to fund part of their large capital programs. As debt expenses rise, there is a negative impact on profits and a reduction in cash that might be available for dividend payments and share buybacks.
Rate hikes have likely peaked, and bond markets have started to price in rate cuts for some time in the back half of 2024. This is a big reason TRP stock rebounded a bit over the past three months. If rate cuts materialize in Canada and the United States this year, there could be more upside on the way.
TC Energy’s Coastal GasLink pipeline project finally reached mechanical completion in late 2023. This is a relief to investors who watched the budget of the project more than double to about $14.5 billion. Management spent much of 2023 monetizing non-core assets to reduce debt and shore up the balance sheet. That process is expected to continue in 2024.
Despite the challenges, TC Energy will likely report strong financial results for 2023. The company has increased the dividend annually for more than 20 years, and the stock now offers a 7% yield.
Telus
Telus is another great dividend stock that offers a high yield and has increased the payout annually for more than two decades. Rising interest rates are to blame for much of the decline in the stock over the past couple of years as well, but Telus also saw revenue drop in its Telus International subsidiary in the first half of 2023. This resulted in a staff reduction of about 6,000 people, as the company adjusted to the challenging economic conditions and moved to streamline operations.
Telus trades near $24 at the time of writing compared to more than $34 at the high point in the spring of 2022. The drop looks overdone, given the relatively small contribution to the financials from the international business, and investors who buy the stock at the current level can get a 6.2% dividend yield.
Telus gets the majority of its revenue and earnings from the core Canadian mobile and internet subscription business lines. These are essential services required by homes and businesses, so Telus should be a good stock to own through an economic downturn.
The bottom line on top TSX dividend stocks
Ongoing volatility should be expected, and these stocks could retest the 12-month lows if the Bank of Canada is forced to keep interest rates at the current level into 2025. That being said, TC Energy and Telus pay attractive dividends that should continue to grow, so you get paid well to ride out any additional market swings. If you have some cash to put to work, these stocks look cheap today and deserve to be on your radar.
