A number of top Canadian dividend stocks are down considerably from the highs they hit in 2022 after the big post-pandemic rally. Investors who have watched the pullback over the past two years are wondering which top TSX dividend stocks are now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP).
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades near $63.50 at the time of writing. The stock was as high as $93 in early 2022 before rising inflation forced the Bank of Canada and the U.S. Federal Reserve to start raising interest rates to cool off the economy.
Rising interest rates can be positive for banks by enabling higher net interest margins. However, the sharp jump in rates over such a short period of time has also put borrowers carrying too much debt into a difficult situation when their interest payments increase. Bank of Nova Scotia and its peers have all increased provisions for credit losses (PCL) in recent quarters. Investors worry that rates will have to stay too high for too long and could trigger a wave of bankruptcies among businesses and a surge in unemployment that could drive up mortgage defaults.
So far, the economy has absorbed the rate hikes very well. Unemployment remains low, even as inflation is falling, although it could remain a bit sticky near the 3% level. Economists broadly expect the central banks to navigate a soft landing for the economy through a reduction of interest rates later this year or in 2025. Assuming that turns out to be the case, BNS stock is probably undervalued right now.
Investors who buy BNS at the current level can get a 6.7% dividend yield.
TC Energy
TC Energy (TSX: TRP) has also been impacted by rising interest rates. The energy infrastructure giant uses debt as part of its funding strategy to finance its growth initiatives. Higher borrowing costs eat into profits and can make some potential projects unprofitable, reducing the growth outlook.
TC Energy’s recently completed 670km Coastal GasLink pipeline is a good example of the risks that come with big-budget projects that take years to build. The development is expected to have a final price tag of about $14.5 billion, which is more than double the initial estimate when the company gave the project the green light in 2018. Soaring material prices, bad weather, and contractor disputes, among other issues, all contributed to the jump in the costs of the project.
The bad news should mostly be in the rearview mirror. Management has done a good job of monetizing non-core assets to cover the Coastal GasLink hit and shore up the balance sheet. The company raised $5.3 billion through asset sales in 2023 and expects to sell another $3 billion in 2024. TC Energy is also on track to spin off the oil pipelines business to unlock value and further boost the cash position.
The stock trades near $49 at the time of writing compared to more than $73 at the high point in 2022. Despite the various challenges in 2023, the overall business delivered strong financial results last year, and management expects the ongoing capital program to support planned annual dividend increases of 3% to 5%.
Investors who buy TRP at the current level can get a 7.8% dividend yield.
The bottom line on top stocks for passive income
Bank of Nova Scotia and TC Energy pay attractive dividends that should continue to grow. If you have some cash to put to work in a buy-and-hold TFSA or RRSP, these stocks look cheap today and deserve to be on your radar.
