Investors punished pipeline stocks and telecoms over the past two years due to rising debt costs caused by soaring interest rates. With rate cuts now underway in Canada and expected to begin in the United States in the coming months, contrarian investors are wondering which top TSX dividend stocks are now undervalued and good to buy for a portfolio focused on income and total returns.
Enbridge
Enbridge (TSX:ENB) trades near $48.50 at the time of writing compared to $$59 in June 2022. The stock fell as low as $43 in early October last year before bargain hunters started to buy the stock on bets that rate hikes had peaked in Canada and the United States.
ENB stock has since drifted higher, and more gains should be on the way.
The company is in the process of wrapping up its US$14 billion takeover of three natural gas utilities in the United States. The addition of these businesses will make Enbridge the largest natural gas utility operator in North America. Natural gas is a greener fuel than coal or oil when burned to produce electricity. As the world transitions to renewable energy, gas-fired power production is expected to grow. Solar and wind have limitations, so there has to be a reliable alternative to produce power to meet demand surges or to cover gaps when the wind dies down, and there isn’t adequate sunshine.
At the same time, governments are recalculating their electricity needs as artificial intelligence (AI) data centres grow and electric vehicles gobble up more power.
Oil demand is expected to remain strong in the coming years. Adoption of electric vehicles is slowing as people balk at the high prices and the lack of charging infrastructure. This means internal combustion engine (ICE) vehicles still have a long life in developed economies and may never be fully replaced in some markets where EVs are simply too expensive.
Geopolitical unrest in key oil-producing regions is driving buyers to seek out reliable supplies from Canada and the United States. Enbridge moves 30% of the oil produced in the two countries and owns the largest oil export terminal in Texas.
Enbridge continues to invest in growth projects. The $25 billion secured capital program will help drive steady increases in distributable cash flow (DCF) over the next few years. This should support ongoing dividend hikes in the range of 3-5%, in line with the anticipated DCF growth. Reduced debt expenses driven by lower interest rates will also free up cash for distributions.
Enbridge raised the dividend in each of the past 29 years. Investors who buy the stock at the current level can get a yield of 7.5%.
BCE
BCE (TSX:BCE) trades below $43 per share at the time of writing. This is a low not seen for more than a decade. The decline from the 2022 high has surprised many long-term holders of the shares. BCE stock was as high as $74 two years ago before rate hikes in Canada triggered an exodus. It is possible that rates from Guaranteed Investment Certificates (GICs) became attractive enough to lure away some risk-shy income investors. GICs offered rates as high as 6% at one point last year. Investors can still get rates in the 4-5% range.
The sharp rise in interest rates has also had an impact on the bottom line. BCE spends billions of dollars every year on wireless and wireline network upgrades. The company uses debt to fund part of the capital program, so higher borrowing costs are cutting into profits and can reduce the cash that is available for distributions. This could be why the board raised the dividend by 3% for 2024 instead of by the 5% annual average over the previous 15 years. The reduced dividend increase might have contributed to the extension of the decline in the stock.
Falling interest rates in Canada should free up more cash in 2025. BCE has also slashed expenses through the sale and closure of dozens of radio stations along with a large reduction in staff. Benefits from these moves should turn up in the 2025 results. Challenges in the media group persist, but the market’s reaction to them is likely overblown.
BCE expects 2024 revenue and adjusted EBITDA to be in line with 2023 or slightly higher. Based on this outlook the stock appears oversold. Investors who buy BCE at the current level can get a 9.3% dividend yield.
The bottom line
Near-term volatility should be expected, but Enbridge and BCE already look cheap and pay attractive dividends that should be safe. If you have some cash to put to work in a portfolio focused on passive income, these stocks deserve to be on your radar.
