Self-directed Registered Retirement Savings Plan (RRSP) investors are seeking TSX stocks that pay reliable dividends and offer a shot at generating decent capital gains. The pullback in the share prices of many top Canadian stocks is giving retirement investors a chance to buy great companies at undervalued prices for buy-and-hold portfolios.
TC Energy
TC Energy (TSX:TRP) trades near $52 per share at the time of writing compared to $74 at one point in 2022. The drop looks overdone, and investors can now get a 7.1% dividend yield from the stock.
The decline is largely due to the impact of rising interest rates over the past two years. Higher interest rates drive up borrowing costs for businesses that use debt to fund part of their growth initiatives. TC Energy has a large capital program, so the jump in debt expenses puts a dent in profits and can reduce the cash that is available for dividend payments.
TC Energy also saw expenses soar on a major project over the past few years. Fortunately, the Coastal GasLink pipeline reached mechanical completion in 2023. The final cost is expected to be around $14.5 billion, more than double the initial budget.
Rate headwinds will likely remain in place for the next few months, but TC Energy made good progress last year with non-core asset sales to shore up the balance sheet and reduce debt. Management is continuing the process in 2024 with the anticipated spinoff of the oil pipeline businesses and the monetization of additional assets.
The overall business actually performed very well last year, and TC Energy expects to generate adequate revenue and cash flow growth to support planned annual dividend increases of at least 3% over the medium term. Investors have received a dividend increase annually for more than 20 years, so the payout should be safe.
Most of the pain should now be in the rearview mirror, and investors get paid well to wait for the next rebound.
TD Bank
TD (TSX:TD) trades around $80 per share at the time of writing compared to $107 two years ago. As with TRP, the decline is primarily due to rising interest rates.
In the case of the banks, the concern among investors is that the Bank of Canada and the U.S. Federal Reserve have pushed rates too high and will keep them elevated for too long. Households and businesses with excess debt are struggling to cover the increase in loan payments. Losses for the banks have been relatively small up to this point, but loan defaults could balloon if the economy crashes and unemployment soars.
At this point, economists widely expect a short and mild recession to occur as inflation subsides. In that scenario, TD stock looks oversold. Rates might stay higher for longer than the market currently anticipates, but they will eventually come down to ease pressure on borrowers.
TD remains very profitable and has a large capital cushion to ride out challenging times. The board recently increased the dividend, so management can’t be too concerned about the outlook for profits, even in the current economic environment.
Investors who buy TD stock on big pullbacks have historically reaped decent long-term rewards. At the current share price, TD provides a 5% dividend yield.
The bottom line on top TSX dividend stocks
TC Energy and TD Bank pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed RRSP, these stocks look cheap today and deserve to be on your radar.
