Canadian savers can still find some high-yield TSX dividend stocks trading at discounted prices. Buying stocks on a pullback requires a contrarian investing style, but the strategy can boost returns considerably over the long haul through higher yields and potential capital gains.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) trades near $65 per share at the time of writing. This is up from the 12-month low of around $55 but is still way off the $93 the stock reached at the peak of the post-pandemic rally.
The decline in the share price that occurred through 2022 and most of 2023 was largely due to hikes in interest rates by the Bank of Canada and the U.S. Federal Reserve in their battle to get inflation under control.
Rising interest rates are usually good for banks due to the positive impact on net interest margins. However, the steep rise in rates over such a short timeframe has also led to a jump in provisions for credit losses (PCL) as the banks set aside more cash to cover potential losses on loan defaults. Businesses and households with too much debt taken on at low rates are struggling to cover the jump in borrowing costs.
The recovery in the share price over the past six months is due to investors anticipating rate cuts will occur in the second half of this year. Inflation in Canada is down to 2.7% as of the April 2024 report and came in at 3.4% south of the border. Analysts expect the central banks to begin reducing rates in the coming months to avoid driving the economy into a recession.
As long as unemployment doesn’t surge, Bank of Nova Scotia and its peers should see PCL start to level off or even decline in the coming quarters.
Bank of Nova Scotia remains very profitable despite the challenging environment, and the overall loan book is in decent shape. Investors who buy BNS stock at the current level can pick up a 6.5% dividend yield.
BCE
BCE (TSX:BCE) is another contrarian pick for a self-directed RRSP. The stock is down more than 25% over the past year and fell to a 10-year low in recent months.
Rate hikes are largely to blame in this case as well. BCE uses debt to fund part of its growth program that includes upgrading the wireline and wireless networks. Higher borrowing costs put a dent in profits and can reduce cash that is available for distributions.
BCE raised the dividend by 3.1% for 2024. This is below the 5% per year average hike over the previous 15 years, so the impact of higher debt expenses is evident. At the same time, BCE’s media business is facing revenue challenges as advertisers reduce spending on radio and television. BCE announced a reduction of 6,000 positions across the company over the past year to adjust to the current market conditions.
Headwinds are expected to persist through this year and into 2025, but the reduction in expenses due to lower headcount and the anticipated decline in interest rates should deliver better financial results in 2025 and 2026. For this year, BCE expects revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be similar to 2023. Based on this outlook, the stock is probably oversold.
Investors who buy BCE at the current price can get a dividend yield of 8.6%, so you get paid well to ride out the turbulence.
The bottom line on top dividend stocks
Ongoing volatility should be expected, but Bank of Nova Scotia and BCE look cheap today and pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks deserve to be on your Registered Retirement Savings Plan radar.
