Several leading Canadian dividend stocks continue to trade at undervalued prices. This is giving investors a chance to pick up top TSX stocks with high yields for a self-directed Tax-Free Savings Account (TFSA) focused on generating growing passive income.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades near $66 at the time of writing. This is up from $55 four months ago but is still well below the $93 the stock reached in early 2022 during the post-crash rally.
Bank of Nova Scotia just reported solid fiscal first-quarter (Q1) 2024 results that came in better than expected by analysts who cover the stock. The bank generated adjusted net income of $2.21 billion in the quarter compared to $2.35 billion in Q1 2023. The drop is largely due to a jump in provisions for credit losses (PCL). This is money the bank sets aside to cover loans that are at risk of going into default.
Staff cuts in 2023 reduced expenses as part of a streamlining process under the new chief executive officer (CEO). While PCL rose to $962 million from $638 million in the same period last year, the overall loan book remains in decent shape.
Bank of Nova Scotia finished the quarter with a common equity tier-one (CET1) ratio of 12.9%, so the bank has excess capital on hand to ride out ongoing economic turbulence. Canadian banks are required to have a CET1 ratio of at least 11.5%.
Bank of Nova Scotia raised the dividend when it announced the Q4 2023 results. Investors who buy the stock at the current level can get a 6.4% dividend yield.
BCE
BCE (TSX: BCE) cut 1,300 jobs in 2023 and recently announced a reduction of a further 4,800 positions. The decisions were largely driven by weak ad sales in the media operations. BCE owns a television network, specialty channels, and radio stations that are struggling to maintain advertising customers as businesses trim marketing budgets to preserve cash as costs increase. Ad spending is also shifting to digital alternatives. BCE’s own digital platforms are the bright spot in the media division, but revenue growth in these segments hasn’t offset the losses in the traditional media operations.
BCE will see free cash flow slip in 2024 as a result of the charges for the large staff cuts and higher borrowing costs. Looking ahead to 2025, however, things should be better. The cost structure will be much leaner, and the Bank of Canada is expected to start cutting interest rates at some point this year.
BCE met its financial targets for 2023, despite the headwinds, and raised the dividend by 3.1% for 2024. This is a contrarian pick today, but income investors can now get a 7.9% yield from BCE.
The bottom line on top stocks for passive income
Bank of Nova Scotia and BCE pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA focused on passive income, these stocks look cheap today and deserve to be on your radar.
