Expectations for rate cuts in Canada and the United States are starting to bring bargain hunters back to dividend stocks that dropped over the past two years.
Investors who missed the recent bounce and are wondering which top TSX dividend stocks are still undervalued today and might be good to buy for their self-directed Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) accounts.
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TC Energy
TC Energy (TSX:TRP) is up about 6% in the past month but still trades below $53 compared to more than $73 at the high point in 2022 before the Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates.
Pipeline companies grow through a combination of acquisitions and organic growth projects. Debt plays a role in the financing of the growth initiatives, so a steep rise in borrowing charges can put pressure on projects that cost billions of dollars to build and often take years to complete. A jump in debt expenses puts pressure on profits and can reduce cash available for distributions.
Interest rates are expected to decline in the second half of 2024 or in 2025. This should attract investors back to the pipeline sector.
TC Energy’s 670 km Coastal GasLink project reached mechanical completion last year. The final cost is expected to be around $14.5 billion, which is more than double the initial budget. TC Energy’s overall business, however, performed well in 2023, and management expects ongoing capital investments to support planned annual dividend increases of at least 3%. The board has increased the payout annually for more than two decades.
TC Energy’s extensive natural gas transmission network and gas storage capacity in Canada, the United States, and Mexico put the company in a good position to benefit from an anticipated surge in demand for natural gas in the coming years as power-hungry data centres are built to support artificial intelligence. A large chunk of the electricity they use will likely be produced by gas-fired power plants, along with renewable sources.
At the time of writing, TRP stock provides a 7.3% dividend yield.
Telus
Telus (TSX:T) generated growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of 7.6% in 2023. That’s pretty good, considering the management team had to reduce guidance last summer due to revenue challenges faced by the Telus International subsidiary. Revenue pressures in that group are expected to continue through most of 2024, but management anticipates an improvement in demand by the end of the year.
In 2024, Telus is targeting adjusted EBITDA growth of 5.5% to 7.5%. Free cash flow is expected to improve, and the dividend should continue to grow. Telus reduced staff by roughly 6,000 positions last year. The impact of the lower expenses should show up in the 2024 results.
Price wars and an uncertain regulatory environment could be an overhang for the stock over the medium term. That being said, investors who buy Telus stock at the current level can collect a decent 7% dividend yield while they wait for the rebound.
The bottom line on top TSX dividend stocks
TC Energy and Telus pay attractive dividends that should continue to grow. If you have cash to put to work, these stocks deserve to be on your radar.
