Surging interest rates contributed to the decline in the share prices of many top TSX dividend stocks over the past two years. With rate cuts likely on the way before the end of 2024, bargain hunters are wondering which Canadian dividend stocks with high yields might be undervalued right now and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Enbridge
Enbridge (TSX: ENB) is up about 12% over the past few weeks, but at $51 per share the stock is still well below the $59 mark it hit in 2022, so more gains could be on the way in the coming months.
Enbridge is picking up a tailwind from two sources. First, investors are beginning to move back into dividend-growth stocks ahead of the anticipated rate cuts by the U.S. Federal Reserve and the Bank of Canada. Lower rates will reduce borrowing costs and help drive better profits for companies like Enbridge that use debt to fund their large capital projects and acquisitions.
Anticipated growth in natural gas demand might be another reason for the renewed buying of ENB stock. Enbridge has extensive natural gas transmission networks that move 20% of the natural gas used in the United States. In addition, the company is set to become the largest natural gas utility operator in North America once it completes the $14 billion acquisition of three U.S. natural gas utilities.
Data centres for artificial intelligence use a lot of power and are expected to grow steadily in the coming years. Renewable energy expansion likely won’t keep pace and power sources like solar and wind can be unreliable. Natural gas is abundant in the U.S. and Canada and is a cleaner alternative to oil and coal when burned to produce power.
Enbridge has a $25 billion capital program on the go that will help drive 3-5% annual growth in distributable cash flow in the coming years. This should support dividend increases in the same range. Enbridge raised the payout in each of the past 29 years. At the time of writing the stock provides a 7.1% dividend yield.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades near $65 per share at the time of writing. It dipped to $55 in late October last year but is way off the $93 it reached in early 2022.
Rising interest rates are largely to blame in this case, as well. However, the concern among investors has been that a recession could occur as the central banks try to cool off the economy to get inflation back down to the 2% target. If rates remain too high for too long, the banks risk seeing a surge in loan defaults from businesses and households. Provisions for credit losses are already increasing. In the event there is a surge in unemployment while rates are still too high, a flood of bankruptcies could occur.
At this point, however, economists broadly expect the central banks to navigate a soft landing for the economy as the begin to reduce interest rates, likely in the second half of this year. Assuming this scenario pans out, Bank of Nova Scotia is probably cheap today, and investors should see its share price drift higher.
Investors who buy BNS stock at the current level can get a 6.5% dividend yield.
The bottom line on top TSX dividend stocks
Enbridge and Bank of Nova Scotia pay attractive dividends that should continue to grow. If you have some cash to put to work in a portfolio focused on high-yield dividends, these stocks deserve to be on your radar.
