BCE (TSX:BCE) and TC Energy (TSX:TRP) trade at discounted prices and now offer very high dividend yields. Retirees and other investors focused on generating passive income on their savings are wondering if BCE stock or TRP stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) targeting high-yield dividend stocks.
BCE
BCE is down about 30% over the past 12 months. The stock trades near $45 per share at the time of writing and was close to $44 in recent days. It has been a decade since investors last had a chance to buy BCE at this level.
BCE is facing a variety of challenges that include high interest rates, falling ad revenue, and regulatory uncertainty.
The jump in interest rates over the past two years is the largest negative for BCE’s share price. The company uses debt to fund its large investments in network upgrades. Higher borrowing costs reduce profits and can reduce cash that is available for distributions.
On the operational side, BCE’s media group is facing declining ad revenue in the television and radio segments as customers switch to digital alternatives or trim marketing budgets to protect cash positions. BCE announced staff cuts of roughly 6,000 positions in the past year to position the business to meet its financial goals. The company closed and sold some radio stations and trimmed television programming.
BCE is also navigating regulatory uncertainty amid government intentions to force BCE and other network owners to allow competitors to use their assets to deliver services. BCE invests billions of dollars every year to run fibre optic lines to the buildings of its customers. Management argues that it doesn’t make much business sense to spend all that money to benefit another company.
BCE raised the dividend by 3.1% for 2024. Investors who buy the stock at the current level can get a dividend yield of 8.8%. BCE expects 2024 revenue and earnings before interest, taxes, depreciation, and amortization (EBITDA) to be similar to 2023. The distribution should be safe, but investors need to consider the possibility of a cut at some point if the financial situation deteriorates in the next few years.
TC Energy
TC Energy is a major player in the North American energy infrastructure sector, with more than 90,000 km of natural gas pipelines and 650 billion cubic feet of natural gas storage capacity in Canada, the United States, and Mexico. The company also has oil pipelines and power-generation facilities. TC Energy plans to spin off the oil pipeline business this year to unlock value for shareholders and shore up the balance sheet. This follows the sale of $5.3 billion of interests in American assets last year. Another $3 billion in monetization is expected in 2024.
These initiatives will enable TC Energy to reduce and improve its financial position to pursue the remainder of its capital program. The $14.3 billion Coastal GasLink project that reached mechanical completion last year cost more than double the original estimate.
High interest rates are negative for TC Energy in the same way they impact BCE. That being said, TC Energy’s overall business delivered strong results in 2023 and management expects the capital program to support planned annual dividend increases of 3-5% over the medium term.
The stock trades near $49 at the time of writing compared to more than $70 at the peak in 2022. Investors can now get a 7.8% dividend yield.
Is one a better pick?
BCE and TC Energy both look oversold at this point and should be solid picks for a portfolio focused on passive income. If you only choose one, I would probably go with TC Energy as the first choice right now. The slide in recent weeks looks overdone, and the stock probably has better upside potential over the medium term.
