Rising interest rates are largely to blame for the decline in the share prices of some of Canada’s top dividend stocks over the past two years. Investors seeking high-yield passive income are wondering which TSX dividend-growth stocks might be good to buy today for a self-directed income portfolio.
Telus
Telus (TSX: T) trades near $20 at the time of writing. This is way off the $34 the stock reached in 2022 before the Bank of Canada aggressively raised interest rates to fight surging inflation.
The Bank of Canada recently cut its target interest rate by 0.25% and more reductions are expected later this year and through 2025 as the central bank shifts focus from reducing inflation to avoiding a recession. Unemployment rose to 6.4% in Canada in June. A weaker employment market will reduce upward pressure on wages and help reduce inflation. This should support ongoing rate cuts.
Lower interest rates should provide support for Telus. The company spends billions of dollars every year on network expansion and upgrades. Debt is used to fund part of the capital program, so a drop in borrowing costs will reduce expenses and boost profits while also keeping more cash in the business to use for dividends or reducing debt.
Telus expects adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to grow by at least 5.5% in 2024 on top of a 7.6% gain in 2023. Based on this outlook the decline in the share price appears overdone.
Investors who buy Telus at the current level can get a 7.6% dividend yield.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades for less than $62 per share at the time of writing. The stock was as high as $93 in early 2022 at the peak of the rally that occurred after the 2020 market crash.
This is arguably a contrarian pick among the Canadian banks. Bank of Nova Scotia’s share price has trailed the performance of its large peers for several years, but that could change going forward. The new chief executive officer (CEO) is shifting the growth focus away from South America, where Bank of Nova Scotia spent billions to acquire assets and build businesses in Peru, Chile, and Colombia. Reliance on volatile commodity markets and political uncertainty have made these emerging markets turbulent, and the perceived risks are likely the reason investors have preferred the other Canadian banks. The South American operations could remain in the portfolio or get sold, with the proceeds used to target opportunities in other markets.
Bank of Nova Scotia now plans to invest in growth in Canada, the United States, and Mexico. It will take time for the new strategy to deliver results, so investors will need to be patient. In the meantime, Bank of Nova Scotia remains very profitable, and declining interest rates should stabilize provisions for credit losses in the coming quarters as over-leveraged borrowers get a bit of a break in loan expenses.
Ongoing turbulence should be expected until rate cuts start to have a meaningful impact, but investors should do well over the long haul. BNS stock currently provides a 6.9% dividend yield, so you get paid a decent return to wait for the recovery.
The bottom line on top TSX dividend stocks
Additional downside is certainly possible over the near term, but Telus and Bank of Nova Scotia already look undervalued and provide attractive dividends that should continue to grow. If you have some cash to put to work in a portfolio focused on passive income, these stocks deserve to be on your radar.
