BCE (TSX:BCE) and Enbridge (TSX:ENB) are major TSX stocks that currently offer high dividend yields after big pullbacks in the share prices. Investors are wondering if BCE stock or ENB stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on generating reliable passive income.
BCE
Shareholders of Canada’s largest communications company have taken a beating over the past two years. BCE stock is down from $74 at one point in 2022 to around $47 at the time of writing. This isn’t far off the $44 it recently hit, marking a 10-year low for the stock.
High interest rates are driving up borrowing costs for telecom, pipeline, and utility companies that tend to have large capital programs that use debt to fund the projects. BCE spends billions of dollars every year on network upgrades. The jump in borrowing expenses is putting a dent in profits and reduces cash that can be used to pay dividends.
BCE has also had to deal with price wars on mobile plans and a decline in advertising revenue in the media business, where spending on television and radio promotions has dropped as companies trim marketing budgets or shift the ad budgets to digital alternatives. Management announced job cuts in the range of 6,000 positions over the past year to adjust to the market conditions and position the company to meet its financial targets. Investors should see the full benefit of lower expenses in 2025.
Despite the headwinds, BCE expects 2024 revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be similar to 2023 with some potential upside. Based on this outlook, the slide in the share price is likely overdone.
BCE raised the dividend by 3.1% for 2024. The stock currently provides a dividend yield of 8.4%.
Enbridge
High interest rates are largely to blame for the decline in Enbridge’s share price from $59 two years ago to the current price near $49. As with BCE, Enbridge uses debt to fund part of its growth program that includes acquisition and development projects.
Enbridge has a capital program of $25 billion on the go and is in the process of wrapping up its US$14 billion purchase of three natural gas utilities in the United States. The resulting revenue boost should raise distributable cash flow (DCF) by about 3% per year through 2026 and by 5% after that timeframe.
Enbridge increased the dividend by 3.1% for 2024. The board raised the distribution in each of the past 29 years. Investors who buy ENB stock at the current level can get a 7.4% dividend yield.
Is one a better pick for passive income?
BCE and Enbridge pay attractive dividends that should continue to grow. If you only buy one right now, BCE offers the higher yield and is likely more oversold. That being said, I would probably split a new investment between the two stocks at their current levels.
The Bank of Canada just cut interest rates. As the central banks shift to more rate cuts, these stocks could both catch a new tailwind in the coming months.
