Canadian savers who missed the rally off the 2020 market crash are getting another chance to buy great Canadian dividend stocks at undervalued prices for a self-directed Registered Retirement Savings Plan (RRSP) focused on high yields.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades near $63.50 per share compared to $93 in early 2022. The stock actually fell as low as $55 last fall. Bargain hunters who bought BNS stock at that point are already sitting on decent gains, but more upside should be on the way.
The Bank of Canada recently cut interest rates in a signal to the market that the central bank is comfortable with the downward inflation trend. Focus is now shifting to the avoid a hard landing for the economy.
Bank of Nova Scotia and its peers have increased provisions for credit losses (PCL) considerably in recent quarters as the sharp rise in interest rates started putting pressure on businesses and households that are carrying too much debt. The 0.25% drop in interest rates will immediately help holders of variable-rate loans. At the same time, the resulting decline in bond yields should bring some relief to those who need to renew fixed-rate mortgages in the coming months. The Bank of Canada is expected to continue reducing rates through next year. As a result, PCL should level off and then start to decline in the coming quarters. This should bring more investors back into the banking sector.
Bank of Nova Scotia remains very profitable despite the challenging environment. The bank generated fiscal second-quarter (Q2) 2024 adjusted net income of $2.1 billion compared to 2.16 billion in the same period last year. Staff cuts in 2023 will help buffer earnings this year, and a strategy shift to focus more on Canada, the United States, and Mexico should start to bear fruit over the medium term.
Bank of Nova Scotia has a strong capital position with a common equity tier-one (CET1) ratio of 13.2%. This means it has excess capital to ride out additional turbulence or fund potential growth initiatives. The stock looks cheap, currently trading at roughly 1.1 times book value compared to the five-year average of 1.28 times book value.
Investors who buy now can get a dividend yield of 6.7%.
Telus
Telus (TSX: T) trades near $21.50 at the time of writing, which isn’t far off the nadir of the pandemic crash. The stock rallied to $34 at the peak in 2022, so it has essentially given back all those gains.
Soaring interest rates through the back half of 2022 and most of 2023 are largely responsible for the decline in the share price over the past two years. Telus uses debt to fund part of its capital program, which includes the expansion and upgrade of its wireless and wireline networks. Higher borrowing costs reduce profits and cut into cash that is available for distribution to shareholders. Now that the Bank of Canada has started to cut interest rates, there could be a transition of funds in the coming quarters from fixed income to high-yield dividend stocks, including Telus.
The company generated a 7.4% gain in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2023 despite the interest rate headwinds and revenue declines in the Telus International subsidiary. Challenges persist, but management still expects Telus to grow adjusted EBITDA by at least 5.5% in 2024. Based on this guidance, the stock is likely oversold. Telus trades near two times book value right now compared to its five-year average of 2.48 times book.
Telus has increased the dividend annually for more than two decades. At the current share price, investors can get a 7.2% dividend yield.
The bottom line on top dividend stocks for RRSP investors
Ongoing volatility should be expected, but Bank of Nova Scotia and Telus already look cheap 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 RRSP radar.
