TFSA Pension: 1 Great Canadian Dividend Stock to Own for Growing Passive Income

This TSX dividend stock is down 35% from the 2022 high. Is it finally oversold?

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Canadian savers are searching for undervalued dividend stocks to buy for a self-directed Tax-Free Savings Account (TFSA) focused on growing distributions and long-term returns.

Let’s take a look at one discounted TSX dividend stock that started to move higher in recent weeks after an extended decline. More gains could be on the way.

BCE

BCE (TSX:BCE) is down more than 35% from the 2022 high. The stock currently trades near $46 per share compared to the 12-month low of around $44 and more than $60 at this time last year.

Canada’s largest communications firm is an anchor position in many retirement portfolios set up to pay high-yield dividends for passive income. The pullback has shocked long-term holders of BCE shares.

Rising interest rates are largely to blame for the decline in the share price over the past two years. The Bank of Canada raised rates aggressively in 2022 and 2023 as a means of cooling off an overheated economy to bring inflation under control. The strategy appears to be working. Canada’s inflation rate for April 2024 was 2.7%. That’s getting close to the 2% target and is much better than the 8% inflation recorded in June 2022.

High interest rates drive up borrowing costs for companies like BCE, which use debt to fund part of their large capital programs. BCE invests billions of dollars every year in wireline and wireless network upgrades. Higher debt expenses eat into profits and can reduce cash available for payouts to shareholders.

Economists widely expect the Bank of Canada to start cutting interest rates in the second half of 2024. Once the first rate cut occurs, BCE could see a rush of new money flow into the stock as income investors try to lock in the big dividend yield.

On the operational side, BCE’s media businesses are struggling with falling advertising revenue in the radio and television platforms. Customers are shifting marketing money to digital alternatives or are simply cutting back ad budgets to preserve cash. BCE announced job cuts of around 6,000 positions over the past year and sold or closed dozens of radio stations. The company also trimmed television programming to adjust to the changing market conditions. Expenses connected to the changes will impact 2024 results, but investors should see the financial situation improve next year.

Despite the headwinds, BCE still expects 2024 revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be flat or slightly higher compared to 2023.

BCE raised the dividend by 3.1% for 2024. That’s smaller than the average 5% per year hike investors received in the previous 15 years, but the payout should be safe. Investors who buy BCE stock at the current level can get a dividend yield of 8.6%.

The bottom line on top stocks for TFSA passive income

Ongoing volatility should be expected until the Bank of Canada actually begins to cut interest rates. In addition, the broader stock market is due for a correction after its big rally in recent months. As such, BCE could very well slip back to the 12-month low, but the stock already looks cheap and you get paid well to ride out any additional turbulence.

If you have some cash to put to work, this stock deserves to be on your radar for a portfolio targeting passive income.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of BCE.

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