Canadians are using their self-directed Tax-Free Savings Account (TFSA) to build portfolios of investments that can provide retirement income. The pullback in the share prices of several top TSX dividend stocks is giving investors a chance to buy at undervalued prices and secure good dividend yields.
TD Bank
TD (TSX:TD) is arguably a contrarian pick right now. The stock is down 10% in 2024 and, at the current price near $76.50, is way off the $108 the stock fetched in early 2022.
TD’s American operations are being investigated by regulators for failing to have adequate systems in place to identify and block money laundering. The bank recently announced it is setting aside US$450 million to cover potential fines. Analysts are concerned that penalties could go as high as US$4 billion before the whole process is settled. Fines at that level would wipe out a large chunk of TD’s excess cash and could force the bank to raise funds through a share sale.
Pundits are also concerned that TD could be forced to shelve its growth ambitions in the United States until it gets the green light from the American authorities that they are satisfied with changes made to address the issue. TD operates more branches in the United States than it does in Canada. The American business was built through a string of acquisitions over the past 20 years, running from Maine down the East Coast to Florida.
Near-term volatility should be expected until there is clarity on the size and scope of the penalties, but TD will eventually get the problems fixed and the bank remains very profitable. At the current share price, TD stock is likely oversold. Investors who buy at the current level can get a solid 5.3% dividend yield while they wait for a rebound.
Enbridge
Enbridge (TSX:ENB) trades below $49 per share at the time of writing compared to $59 at the peak in 2022. The decline that occurred in the second half of 2022 and through much of 2023 is largely due to the steep increase in interest rates in Canada and the United States.
Enbridge uses debt to fund part of its growth program, which includes acquisitions and capital projects. Higher borrowing costs cut into profits and reduce cash available for distributions. The Bank of Canada recently cut its interest rate, and the U.S. Federal Reserve is expected to begin cutting rates in the coming months if inflation continues to trend toward the 2% target. As rates decline, Enbridge should get a nice boost.
Management is targeting distributable cash flow (DCF) growth of 3% per year through 2026 and 5% beyond that timeframe. This should support ongoing dividend increases in the same range. Enbridge raised the payout in each of the past 29 years. Investors who buy ENB stock at the current price can get a dividend yield of 7.5%.
The bottom line on top stocks for a TFSA retirement fund
Additional turbulence should be expected, but TD Bank and Enbridge already look cheap and pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks deserve to be on your radar.
