Stock markets are trading near record highs, but several top TSX dividend stocks have not participated in the rally and currently offer attractive yields.
Buying dividend stocks when they are out of favour requires a bit of courage and the patience to ride out additional weakness. However, the strategy can boost yields on savings and potentially generate long-term capital gains on a rebound.
BCE
BCE (TSX: BCE) is down about 30% in the past year. The pullback has been difficult to watch for long-term holders of the stock. BCE is known for its stable and generous dividend that retirees and other income investors have relied on for decades.
Rising interest rates in Canada are to blame for much of the decline over the past two years. BCE uses debt to fund part of its large capital program. The jump in borrowing costs puts pressure on profits and can eat into cash available for distributions.
BCE has also faced challenges in its media business, specifically in the radio and television segments. Advertisers are cutting marketing budgets or shifting spending to digital alternatives. BCE announced staff cuts of more than 6,000 positions in the past 12 months to adjust to the current conditions.
Despite the difficult times, the company expects 2024 revenue to be roughly in line with last year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) should be marginally higher, according to the latest outlook. Based on those numbers, the pullback in the stock appears overdone.
The board raised the dividend by more than 3% for 2024. Investors who buy BCE stock at the current level can get a dividend yield of 8.9%.
When yields get this high investors have to be careful, as the market might be signalling concerns that the payout is not sustainable. A dividend cut is certainly possible at BCE, but unlikely unless something goes seriously wrong with the business.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) is actually up more than 20% since late October, but the stock still only trades near $68 compared to $93 at one point in early 2022.
High interest rates are to blame in this case, as well, but for different reasons. Bank stocks came under pressure through 2022 and most of 2023 as the Bank of Canada and the U.S. Federal Reserve raised interest rates aggressively to try to get inflation under control. The market worried that loan defaults would surge as businesses and households with too much debt struggle to make the higher loan payments. Bank of Nova Scotia and its peers have increased their provisions for credit losses (PCL) in recent quarters and the trend could continue through this year until the central banks start to cut rates.
The overall loan book, however, remains in good shape, and economists are increasingly predicting a soft landing for the economy. That should avoid a big spike in unemployment that would potentially trigger a wave of bankruptcies.
Bank of Nova Scotia’s new chief executive officer is shifting growth initiatives away from South America to Canada, the United States, and Mexico. The bank trimmed staff by about 3% last year to reduce costs and remains very profitable, so there could be decent upside for the stock if the turnaround efforts start to deliver improved financial results in the next few years.
In the meantime, investors who buy the stock at the current price can get a 6.25% dividend yield.
The bottom line on top stocks for passive income
BCE and Bank of Nova Scotia pay attractive dividends that should be safe. If you have some cash to put to work in a self-directed portfolio focused on passive income, these stocks deserve to be on your radar.
