Canadian investors are searching for great TSX dividend stocks that have long track records of paying out profits to shareholders.
The pullbacks that occurred in certain sectors in the past two years are providing retirees and other dividend investors with a good opportunity to buy high-yield stocks at cheap prices for a self-directed Tax-Free Savings Account (TFSA) targeting passive income or a Registered Retirement Savings Plan (RRSP) focused on total returns.
BCE
BCE (TSX:BCE) is Canada’s largest communications company, with a current market capitalization of nearly $48 billion. The stock trades near $53 per share at the time of writing compared to $65 in May last year and a high of around $74 in 2022.
BCE’s decline over the bulk of the past two years has largely occurred due to the steep increase in interest rates rather than any major operational issues.
The Bank of Canada raised rates aggressively in an effort to bring inflation under control. Inflation in Canada was above 8% in June 2022. It came in at 3.4% in December 2023, so there is still work to do, and some economists think it could remain stubbornly above the 3% mark this year.
In the past few months, however, markets started to price in anticipated rate cuts for the back half of this year. The idea is that the economy should cool off enough that high rates won’t be needed anymore to tame inflation and that the Bank of Canada will have to reduce rates to avoid pushing the economy into a deep recession. BCE and other beaten-up dividend stocks staged a brief rebound as bond yields fell. Recent strong employment data, however, is probably the reason for the latest dip in the stock. Bond yields have jumped again after a few months of declines. This suggests that traders might be starting to push out their expected timeline for rate cuts.
BCE uses debt to fund its capital program which includes investments in the expansion of the 5G mobile network and fibre optic lines that connect directly to the premises of clients. Higher borrowing costs caused by the jump in interest rates and subsequent rise in bond yields are going to negatively impact profits. The extent of the drop in the share price, however, looks overdone.
Despite the near-term headwinds, BCE should continue to pay an attractive dividend. Investors have received an increase of at least 5% in each of the past 15 years. Ongoing increases might not be that high, but the payout should at least be safe. Investors who buy BCE stock at the current level can get a 7.25% dividend yield.
One interest begin to decline, the stock could catch a nice tailwind.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) traded for $93 nearly two years ago. Today, contrarian investors can buy the stock for close to $63 and pick up a 6.7% yield. That’s an impressive return from a top-five Canadian bank that generated an adjusted net income of $8.4 billion in fiscal 2023 and expects earnings to be slightly better in 2024, despite the challenging economic conditions.
The bank reduced its staff by 3% last year. This should help reduce overall expenses in fiscal 2024. Bank of Nova Scotia is also shifting its growth strategy away from Pacific Alliance members Chile, Peru, and Colombia to more investment focused on opportunities in Canada and the United States. Mexico, which is also part of the Pacific Alliance trade bloc, will also remain a key market for the bank.
Bank of Nova Scotia has increased its dividend by a compound annual growth rate of around 8% over the past two decades. Provisions for credit losses climbed in 2023 due to the impact of higher interest rates on over-leveraged borrowers. The trend is expected to continue until rates begin to drop, but the overall loan book remains in good shape, and Bank of Nova Scotia has a strong capital cushion to ride out any additional turbulence.
The bottom line
Near-term volatility should be expected, but BCE and Bank of Nova Scotia pay attractive dividends that should be safe. The stocks still appear undervalued right now and offer high yields. If you have some cash to put to work in a buy-and-hold TFSA or RRSP targeting dividends, these stocks deserve to be on your radar.
