Dividend investors can take advantage of the pullback in the share prices of some top TSX dividend-growth stocks to generate high-yield passive income and set up their self-directed Tax-Free Savings Account (TFSA) portfolios for attractive potential capital gains.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades for close to $62.50 at the time of writing. The stock was as low as $55 in October last year but is still way off the $93 it reached in early 2022 at the height of the rally after the 2020 market crash.
Fears that rising interest rates would cause a major recession drove the pullback that occurred from the winter of 2022 to the fall of 2023. The subsequent six-month rally happened as investors started to bet that the Bank of Canada and the U.S. Federal Reserve would aggressively cut interest rates in 2024 and navigate a soft landing for the recession.
Sticky inflation has tempered the enthusiasm for the size and speed of the rate cuts, especially in the United States, thus leading to the pullback in the stock over the past three months. The recent dip, however, could be an enticing entry point.
The Bank of Canada recently cut its interest rate by 0.25%, and more cuts are likely before the end of the year and through 2025. This will ease the pressure on borrowers who are getting hit hard by the jump in debt expenses. Bank of Nova Scotia booked a $1 billion provision for credit losses (PCL) in the fiscal second quarter (Q2) of 2024 compared to roughly $710 million in the same period last year. Falling interest rates should help PCL level off in the next few quarters and start to decline by the end of 2025.
The bank remains very profitable and has a solid capital cushion to ride out turbulence and support the dividend. Investors who buy BNS stock at the current level can get a dividend yield of 6.8%. Based on the price-to-book average of 1.28 over the past five years, BNS looks undervalued today, trading at less than 1.1 times book value.
Enbridge
Enbridge (TSX: ENB) trades for close to $47.50 at the time of writing compared to $59 two years ago, so there is decent upside potential for the pipeline giant.
Enbridge uses debt to fund part of its growth program. This includes acquisitions and development projects. Higher interest rates in the past two years drove up borrowing costs that can cut into profits and reduce the amount of cash that might be available for distributions.
Anticipated interest rate cuts in Canada and the United States in 2025 should bring investors back to the stock. In addition, Enbridge is wrapping up its US$14 billion purchase of three natural gas utilities in the United States and is making progress on a $25 billion secured capital program. As new assets go into service, the company expects distributable cash flow to rise by 3% through 2026 and by 5% after that timeframe. This should support ongoing dividend increases.
Enbridge raised the dividend in each of the past 29 years. At the current share price, investors can get a dividend yield of 7.7% from ENB stock.
The bottom line on top stocks for total returns
Bank of Nova Scotia and Enbridge pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA portfolio targeting high yields and a shot at decent capital gains, these stocks deserve to be on your radar.
