Buying top TSX dividend stocks when they are out of favour takes courage and requires patience to ride out additional volatility. This contrarian investing strategy can, however, boost dividend yields and potentially deliver very attractive total returns over the long haul.
TD Bank
TD (TSX:TD) is under pressure as a result of ongoing investigations by American regulators into TD’s U.S. operations. The division, which operates more branches than the Canadian business, is in the spotlight for allegedly not having adequate systems in place to detect and prevent money laundering. TD recently set aside US$450 million to cover potential fines. Analysts speculate the final penalties could run as high as $US2 billion to US$4 billion.
TD has significant excess capital on hand, but fines at the upper end of the analyst estimates would wipe out a good chunk of the extra cash and could potentially force the bank to raise additional funds through a share sale.
It will take some time to get the issues sorted out and the problem will likely drive up expenses in the coming quarters while remaining a distraction for senior management. At the same time, TD’s growth ambitions in the American market could be restricted until the American regulators are satisfied that the situation has been adequately resolved.
On the positive side, TD remains a very profitable bank and management will eventually get the challenges in the U.S. business fixed. In the meantime, investors can buy TD at a discounted price and lock in a decent dividend yield.
TD trades near $79 per share at the time of writing. Bargain hunters started buying in June when the stock hit $74. TD was as high as $108 in early 2022, so there is decent upside potential once the skies clear. Investors who buy TD at the current level can get a dividend yield of 5%.
TC Energy
TC Energy (TSX:TRP) had a rough ride over the past couple of years, but the company is back on track and investors are starting to take notice.
High interest rates drove up borrowing cost at the same time that TC Energy had to take on extra debt to fund the completion of its 670km Coastal GasLink pipeline. The project’s budget more than doubled to about $14.5 billion. Fortunately, the pipeline reached mechanical completion late last year and is expected to be in commercial operation in 2025.
TC Energy sold stakes in U.S. assets in 2023 to raise $5.3 billion. Efforts to monetize another $3 billion in 2024 are apparently on track. TC Energy is also moving ahead with a spin off of its oil pipelines business to unlock extra value for shareholders.
The asset sales will enable TC Energy to reduce its debt load and focus on the rest of the growth program, which includes investments of roughly $8 billion in 2024 and $6 billion to $7 billion per year over the medium term. Revenue and cash flow from the new assets should support ongoing dividend growth.
TC Energy has increased the payout annually for the past 24 years. At the current share price near $58, investors can get a dividend yield of 6.6%. The stock is up from the 12-month low of around $44 but was as high as $74 in 2022.
The bottom line on top dividend stocks
TD and TC Energy 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.
