Enbridge (TSX:ENB) and TD Bank (TSX:TD) are down considerably from their 2022 highs. Contrarian investors who missed the big rally after the 2020 market crash are wondering if ENB stock or TD stock is now oversold and good to buy for a self-directed Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and total returns.
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Enbridge
Enbridge raised its dividend by 3.1% for 2024, extending the annual dividend-growth streak to 29 years. Despite this, the stock is still out of favour with investors. Enbridge trades for close to $49 at the time of writing. This is off the 12-month low of around $43 but is still down considerably from the $59 it reached two years ago.
The sharp rise in interest rates in Canada and the United States in 2022 and 2023 is largely to blame for the pullback in the stock. Enbridge uses debt to fund part of its growth initiatives, including acquisitions and capital projects. Higher borrowing costs cut into profits and can reduce the cash that is available for distributions to shareholders.
Bargain hunters started to buy ENB again last fall when the market began to anticipate rate cuts in 2024. The Bank of Canada recently cut its target interest rate by 0.25%. The U.S. is still waiting for more evidence that inflation is under control. Once the American central bank starts to trim rates, a flood of new money could shift into the pipeline stocks.
Enbridge continues to make investments to drive growth. The company is in the process of completing its US$14 billion acquisition of three natural gas utilities in the United States and has a $25 billion capital program on the go that is expected to deliver steady growth in distributable cash flow. This should support ongoing dividend hikes. Investors who buy ENB stock at the current level can get a dividend yield of 7.5%.
TD Bank
TD trades near $75 at the time of writing. It was as high as $108 in early 2022. The decline that then occurred through the fall of last year can be partly attributed to the surge in borrowing costs. Investors worried that the central banks would have to push their economies into a recession to get inflation under control. Weaker revenue for businesses and job losses could drive a surge in loan defaults and bankruptcies. TD has already increased its provision for credit losses (PCL) in recent quarters as over-leveraged customers struggle to cover higher debt costs.
The rally in bank stocks late last year and into the first part of 2024 occurred as investors started to anticipate rate cuts and a soft landing for the economy. That is still the expectation among most economists. Falling interest rates should lead to a stabilization of PCL at the banks and an eventual decline or even some reversal of provisions as troubled borrowers get back on their feet.
TD, however, is also dealing with company-specific issues that have been a headwind for the stock. The bank’s American operations are under investigation by U.S. regulators for not having adequate systems in place to detect and block money laundering. TD recently set aside US$450 million for potential fines. Analysts speculate the penalties could eventually run as high as US$4 billion. Fines at that level would wipe out a good chunk of TD’s excess capital. Investors are also concerned that TD might have to shelve its growth program in the United States until regulators are convinced the bank has the anti-money-laundering issue fixed.
On the positive side, TD remains very profitable, and it has a strong capital position to ride out the turbulence and support the dividend. Contrarian investors can now get a solid 5.4% dividend yield from TD stock while they wait for the recovery.
Is one a better pick?
Ongoing volatility should be expected and additional downside wouldn’t be a surprise in these stocks.
Enbridge offers a higher dividend yield and is probably a safer pick in the near term. If you only buy one, ENB should probably be the first choice. That being said, contrarian investors might want to start nibbling on TD and look to add to the position on any further weakness. Positive news on the U.S. issues could quickly send the stock much higher, and buying TD on big pullbacks has historically proven to be a savvy move for patient investors.
