Self-directed investors are wondering which top TSX dividend stocks are still undervalued and good to buy for a Registered Retirement Savings Plan (RRSP) portfolio focused on high yield and total returns.
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Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) is picking up a new tailwind after giving back a good chunk of the gains it enjoyed during the rally in the fourth quarter (Q4) last year and Q1 2024. BNS stock went from $55 to $70, then reversed course in April and recently slipped to $61. The stock is now back up to $64 and more gains could be on the way.
The Bank of Canada recently cut its interest rate by 0.25%, and the U.S. Federal Reserve is expected to begin cutting rates later this year or in early 2025. Lower borrowing costs will provide some relief to businesses and households struggling to cover loan payments that increased over the past two years as the central banks aggressively raised rates to get inflation under control.
Bank of Nova Scotia and its peers increased provisions for credit losses (PCL) in recent quarters to cover potential loan losses. This impacts profits. As rates decline, there should be a reduction in PCL, and investors could even start to see provision reversals if the economy holds up and unemployment doesn’t surge.
Banks typically benefit from higher interest rates due to the positive impact on net interest margins. We could be entering a period where the banks still benefit from higher rates while PCL gets under control.
Bank of Nova Scotia’s new chief executive officer cut staff by roughly 3% last year to reduce expenses and is shifting growth investments away from South America to Canada, the United States, and Mexico. It will take some time for these efforts to deliver results, but Bank of Nova Scotia has good upside potential on the rebound.
In the meantime, investors can pick up a solid 6.6% dividend yield.
TC Energy
TC Energy (TSX: TRP) trades near $53 at the time of writing. Investors who bought the stock at the 12-month low of around $44 last year are already sitting on nice gains, but more upside should be on the way. TC Energy traded as high as $74 two years go before the central banks cranked up rate hikes.
Higher borrowing costs tend to be negative for pipeline companies that use debt to fund part of their capital programs. Energy infrastructure projects often cost billions of dollars and can take years to complete before they begin to generate revenue. TC Energy’s 670 km Coastal GasLink pipeline is a good example. The project received the green light in 2018 and finally reached mechanical completion late last year at a cost of roughly $14.5 billion, which was more than double the initial budget.
TC Energy spent much of 2023 fixing the balance sheet. The company monetized $5.3 billion in assets last year and expects to sell $3 billion in 2024. Coastal GasLink recently concluded a successful bond sale for $7.15 billion to refinance loans taken on the project. These efforts should put TC Energy in a good position to pursue the remaining growth initiatives. The company expects to invest $8 billion in 2024 and $6 billion to $7 billion per year over the medium term.
As new assets go into service, cash flow should increase enough to support ongoing dividend growth. TC Energy has raised the dividend in each of the past 24 years. At the current share price, investors can get a dividend yield of 7.2%.
The bottom line on top RRSP dividend stocks
Bank of Nova Scotia and TC Energy pay attractive dividends while offering decent upside potential. If you have some cash to put to work in a self-directed Registered Retirement Savings Plan portfolio, these stocks deserve to be on your radar.
