RRSP Investors: 2 Unloved Dividend Stocks With Big Upside Potential

These stocks have great track records of dividend growth and now trade at discounted prices.

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The recent pullback in the share prices of some of Canada’s top dividend-growth stocks is giving investors an opportunity to buy great TSX dividend stocks at discounted prices for a self-directed Registered Retirement Savings Plan (RRSP).

Fortis

Fortis (TSX:FTS) trades for less than $53 at the time of writing compared to $56 in recent weeks. The stock was above $63 two years ago before interest rates started to rise aggressively in Canada and the United States.

Fortis uses debt to fund part of its growth initiatives. Higher interest rates drive up borrowing costs, which can reduce profits and eat into cash that can be paid out to shareholders. The Bank of Canada and the U.S. Federal Reserve are widely expected to start cutting interest rates in the second half of 2024 now that inflation is heading back toward the 2% target. Once rate cuts begin, Fortis could catch a new tailwind.

Fortis is working on a $25 billion capital program that will boost the rate base from $37 billion in 2023 to more than $49 billion in 2028. The resulting increase in revenue and cash flow should support planned annual dividend increases of 4-6% over that timeframe. Fortis has other projects under consideration that could get added to the development list. The company also has a good track record of making strategic acquisitions to drive growth.

Fortis raised the dividend in each of the past 50 years. Investors who buy the stock at the current level can get a 4.5% dividend yield.

TD Bank

TD (TSX:TD) trades for close to $75 at the time of writing compared to $108 in early 2022 at the peak of the rally that occurred after the 2020 market crash. The stock recently dipped to $74, a level investors haven’t seen in more than three years.

TD is arguably a contrarian pick right now. The bank is out of favour due to issues in the American business connected to the bank’s anti-money-laundering systems. Regulators in the United States are investigating TD, and the company recently announced it is setting aside US$450 million to cover potential fines. The process is a distraction for management and could result in TD’s American growth ambitions getting scaled back until the situation is rectified.

TD operates more retail branches in the United States than in Canada, and the U.S. market offers good long-term growth opportunities. The company abandoned its US$13.4 billion takeover of First Horizon, a U.S. regional bank, last year, citing regulatory hurdles.

Despite the headwinds, TD just reported solid fiscal second-quarter (Q2) 2024 results. Adjusted net income rose about 2% to $3.8 billion in the quarter compared to the same period last year. The bank has a solid capital reserve to ride out turbulent times and the dividend should continue to grow. TD has been one of the top dividend-growth stocks on the TSX over the past 30 years.

Investors who buy TD stock at the current level can get a 5.4% dividend yield.

The bottom line on top RRSP stock

Ongoing volatility should be expected and additional downside in the near term is certainly possible. However, Fortis and TD already look cheap and pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed RRSP focused on dividends, these stocks deserve to be on your radar.

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 recommends Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

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