Buying top dividend stocks when they are out of favour requires courage and the patience to wait for a turnaround, but the rewards can be significant through higher yields and potential capital gains.
TC Energy
TC Energy (TSX:TRP) owns and operates energy infrastructure assets in Canada, the United States, and Mexico. The core business is focused on natural gas transmission and storage, with more than 90,000 km of natural gas pipelines and 650 billion cubic feet of natural gas storage capacity. TC Energy also has oil pipelines and power-generation facilities. The company intends to spin off the oil pipeline business in the coming months.
TC Energy trades near $52.50 per share compared to $74 at the high point in 2022. The stock fell as low as $44 last year. Since then, bargain hunters have pushed the share price higher and more gains should be on the way.
Interest rates are already heading lower in Canada and cuts in the United States are expected to begin later this year or in early 2025. A drop in borrowing costs will benefit TC Energy as it moves ahead with its growth program. TC Energy expects to invest $8 billion in 2024 and $6 billion to $7 billion annually over the medium term.
Management has done a good job of strengthening the balance sheet over the past year after the company took on extra debt to complete the $14.5 billion Coastal GasLink project. It had an initial budget of less than half that amount. TC Energy sold interests in American assets for $5.3 billion last year and expects to monetize another $3 billion in 2024. Coastal GasLink recently closed a successful $7.15 billion bond issue to replace loans taken to finance the construction of the 670 km pipeline.
Cash flow growth driven by the capital program should support ongoing dividend increases. TC Energy raised the payout in each of the past 24 years. Investors who buy TRP stock at the current level can get a dividend yield of 7.3%.
Telus
Telus (TSX:T) is another TSX dividend-growth star that looks oversold. The board has increased the payout annually for more than two decades, and the trend should continue.
Telus trades near its 12-month low of around $21, which is also close to the nadir reached during the 2020 market crash. Telus rebounded as high as $34 in 2022, so there is decent upside potential for a recovery.
High interest rates are largely to blame for the decline in the share price over the past two years. With rates in Canada now headed lower there should be some relief on borrowing costs. Telus uses debt to fund part of its capital program.
On the operational side, Telus also saw revenue decline in its international subsidiary that provides multi-lingual call centre and IT services to global clients. The worst appears to be over in the group and investor reaction to the challenges is likely overdone given the relatively small contribution of Telus International to overall earnings.
Telus is targeting growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) of 5.5-7.5% this year. Free cash flow is expected to be solid at $2.3 billion. Based on this guidance, the stock is likely undervalued right now. Investors who buy Telus at the current price can get a 7.3% dividend yield.
The bottom line on top dividend stocks for passive income
TC Energy and Telus pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks look cheap today and deserve to be on your radar for a portfolio focused on high yields.
