Should You Buy TC Energy or Telus?

These top TSX stocks now offer 7% dividend yields.

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TC Energy (TSX:TRP) and Telus (TSX:T) are two top TSX dividend-growth stocks that trade at discounted prices. Investors seeking passive income for their self-directed Tax-Free Savings Account (TFSA) or long-term returns in a Registered Retirement Savings Plan (RRSP) are wondering if Telus stock or TRP stock is now undervalued and good to buy.

TC Energy

TC Energy trades below $53 at the time of writing compared to $74 at the peak in 2022. The stock is actually up nearly 17% in the past six months, but more gains could be on the way.

The decline that occurred in the back half of 2022 and through the first three quarters of 2023 was largely driven by rising interest rates in Canada and the United States. TC Energy builds energy infrastructure assets as part of its growth program. These projects often cost billions of dollars and can take years to complete before they go into service and start generating revenue. TC Energy uses debt to fund part of the capital requirement, so rising borrowing costs can hit profits and reduce cash available for distributions.

The rebound in the stock through the fourth quarter (Q4) of 2023 and Q1 of 2024 occurred as investors shifted expectations from further rate hikes to anticipation of interest rate cuts this year. The Bank of Canada and the U.S. Federal Reserve will likely reduce interest rates at some point in the second half of 2024 in order to avoid driving the economy into a recession. That should be positive for TRP shares.

TC Energy is also making progress on its efforts to reduce debt and shore up the balance sheet after its Coastal GasLink Pipeline cost an estimated $14.5 billion to complete, which was more than double the initial estimate. Management raised $5.2 billion last year through the monetization of non-core assets, and another $3 billion is expected this year. In addition, TC Energy is on track to spin off the oil pipeline operations into a new company to unlock value for shareholders and raise extra cash to pursue the ongoing capital projects.

TC Energy’s overall assets performed well in 2023, despite the various headwinds, and the board raised the dividend by more than 3%. Investors have received an annual increase for more than two decades. At the current share price, TRP stock provides a 7.3% dividend yield.

Telus

Telus trades close to the lows it hit during the 2020 market crash. The decline from the 2022 high of around $34.50 to the current price near $21.50 caught a lot of investors off guard. Telus generates most of its revenue from essential internet and mobile services and doesn’t have a media division, so the cash flow stream is quite reliable.

Telus does, however, have a large stake in Telus International, which it spun off in 2021. The subsidiary provides multi-lingual customer support and IT services to global firms. Telus International saw revenue slide considerably in the first half of last year and TIXT stock fell over the past 18 months from about $40 per share to around $11.50 today.

Telus cut 6,000 positions in 2023 to adjust to market conditions and prepare the business to achieve 2024 targets. TIXT aside, the 2023 results were actually quite good, with overall adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth of 9.4% compared to 2022. Management is targeting adjusted EBITDA growth of 5.5% to 7.5% in 2024.

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Telus has increased the dividend annually for more than 20 years. Investors who buy the stock at the current level can get a 7% dividend yield.

Is one a better pick?

TC Energy and Telus both pay attractive dividends that should continue to grow. At the current prices, I would probably split a new investment between the two stocks. TC Energy has good momentum right now, and Telus is likely oversold at this point. If you have some cash to put to work in a dividend portfolio, these stocks deserve to be on your radar.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends TELUS and Telus International. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Telus.

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