Bargain hunters are starting to move back into top TSX dividend-growth stocks ahead of possible rate cuts by the Bank of Canada this summer. Investors who missed the recent bounce are wondering which Canadian dividend stocks might still be undervalued and good to buy for a self-directed Registered Retirement Savings Plan (RRSP) account targeting total returns.
Fortis
Fortis (TSX:FTS) trades near $55.50 at the time of writing. The stock is up about 10% from the 12-month low but is still way off the $64 it fetched about two years ago before the Bank of Canada and the U.S. Federal Reserve began hiking interest rates aggressively to try to get inflation under control.
The company uses debt to fund part of its growth initiatives. Higher borrowing costs reduce profits and can cut into cash that is available for distribution to shareholders. This is largely why the stock came under pressure in the past couple of years.
Looking ahead, economists widely expect the central banks to start cutting interest rates in the second half of 2024. Inflation is down considerably from the 2022 highs and is expected to trend toward the 2% target. As rates decline, Fortis and other utility stocks should catch a tailwind.
Fortis expects its $25 billion capital program to significantly increase the rate base through 2028. Cash flow should rise enough in the next few years to support annual dividend increases of 4-6%. The board has increased the distribution every year for the past five decades, so investors should be comfortable with the outlook.
The stock provides a 4.25% dividend yield right now. This is smaller than what investors can get from other dividend stocks today, but the steady dividend growth will boost the return on the original investment over time.
TD Bank
TD (TSX:TD) is a contrarian bet right now after the recent plunge triggered by concerns that ongoing regulatory investigations in the United States could lead to large fines and inhibit the bank’s growth opportunities in the American market. The bank announced a preliminary US$450 million provision to cover anticipated fines for issues connected to anti-money-laundering investigations.
TD says it is working with authorities and will make the investments needed to bring its internal systems up to the required standards, but it will take some time to get it all sorted out. The situation will likely keep pressure on the stock until there is clarity on the size of potential fines and any other restrictions that could be placed on TD.
That being said, contrarian investors who buy the dip can now get a 5.3% dividend from TD stock. The bank has a large capital cushion to ride out the turbulence and should eventually get things in order. TD remains a very profitable bank with strong operations in both Canada and the United States. Buying the stock on big pullbacks has historically proven to be a savvy move for patient RRSP investors.
The bottom line on top RRSP dividend stocks
Fortis and TD pay good dividends that should continue to grow. If you have some cash to put to work in a self-directed RRSP focused on dividends and total returns, these stocks look cheap today and deserve to be on your radar.
