Contrarian investors seeking high yields from good TSX dividend stocks have an opportunity to buy some top Canadian dividend-growth names at discounted share prices.
Buying stocks when they are out of favour requires patience. Cheap stocks can get cheaper before they bounce, but the long-term benefits from the higher dividend yield and potential capital gains on a rebound can be significant.
TC Energy
TC Energy (TSX:TRP) trades for close to $52.50 at the time of writing. The stock is up from the 12-month low near $44 but is still way off the $74 the share price reached in 2022 before interest rate hikes really ramped up in Canada and the United States.
TC Energy has a large capital program on the go to drive revenue and cash flow growth in the coming years. The company uses debt as part of its funding strategy to get projects built before they go into operation. Higher borrowing costs caused by rising interest rates tend to cut into profits and can make some projects no longer financially viable.
The Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates in 2022 and 2023 to cool off the economy and get inflation under control. The efforts appear to be working, and economists broadly expect the central banks to start cutting interest rates in 2024 to avoid pushing the economy into a recession.
Once rate cuts begin, TC Energy and other pipeline companies could catch a new tailwind as investors return.
TC Energy is doing a good job of shoring up the balance sheet after a large project went way over budget. The Coastal GasLink pipeline reached mechanical completion in late 2023 at a cost of about $14.5 billion, which was more than double the initial estimate. Asset sales completed in 2023 and those planned for 2024 will bring in more than $8 billion. TC Energy also intends to spin off the oil pipeline businesses to raise additional cash. These efforts should help position the company to pursue the rest of the capital program.
TC Energy has increased the dividend annually for the past 24 years. Investors who buy the stock at the current level can get a 7.3% dividend yield.
BCE
BCE (TSX:BCE) trades near $46 per share compared to nearly $70 two years ago. High interest rates are to blame for much of the pain. BCE invests billions of dollars every year on network upgrades, including the expansion of the 5G mobile network and the running of fibre optic lines to the premises of its customers. As with TC Energy, the communications giant uses debt to fund part of the capital program.
On the operational side, BCE’s media group is seeing weaker ad revenue in the radio and television segments as customers trim marketing budgets or shift spending to digital alternatives. In addition, mobile pricing competition has increased in the past year.
To adjust to changes in the market, BCE announced staff reductions of about 6,000 positions over the past 12 months. Charges connected to the reduction in headcount will impact the 2024 results, but expense savings should start to show up in the 2025 numbers.
Overall, BCE expects revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be in line with 2023 or slightly higher. Based on this outlook, the decline in the share price appears overdone.
BCE increased the dividend by 3.1% for 2024. Investors who buy BCE stock at the current level can get a dividend yield of 8.6%.
The bottom line on top TSX stocks for dividends
Ongoing volatility should be expected until the central banks start cutting interest rates. That being said, TC Energy and BCE already look cheap and 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.
