Cuts to interest rates by the Bank of Canada could provide new support for Canadian dividend stocks that took a beating over the past two years. Many top TSX dividend stocks have already moved higher, but more upside should be on the way.
TC Energy
TC Energy (TSX:TRP) trades near $58 per share at the time of writing. The stock was as low as $45 in the past year but remains way off the $74 it reached in 2022.
TC Energy had to take on extra debt in the past few years to complete its 670 km Coastal GasLink pipeline. The project’s budget more than doubled to roughly $14.5 billion. Fortunately, the pipeline reached mechanical completion in late 2023 and is expected to go into commercial service in 2025.
The cost challenges on Coastal GasLink, along with the surge in interest rates, are to blame for the drop in the share price. Management has done a good job, however, of fixing the balance sheet to support the rest of the growth program. TC Energy sold interests in some American assets last year to bring in $5.3 billion. Monetization of other assets is expected to provide another $3 billion in 2024. TC Energy is also on track to spin off its oil pipelines division this year.
Looking ahead, the company is targeting annual capital investments of $6 billion to $7 billion in 2025 and beyond. As new assets go into service, there should be adequate cash flow expansion to support ongoing dividend growth. TC Energy has increased the payout in each of the past 24 years. Investors who buy TRP stock at the current level can get a dividend yield of 6.6%.
Telus
Telus (TSX:T) is another company that uses debt to fund capital projects. The telecommunications provider spends billions of dollars every year on network expansion and upgrades. Higher borrowing costs in the past couple of years drove up debt expenses and put a pinch on profits. As rates decline, Telus should have more cash available for dividends.
On the operational side, Telus had to reduce its financial guidance in 2023 due to weaker revenue at its Telus International subsidiary, which provides call centre and IT services to global clients. The group accounts for a relatively small part of earnings before interest, taxes, depreciation, and amortization (EBITDA), so the reaction by the market might have been overdone. Telus trades near $22 at the time of writing. It was as high as $34 in the spring of 2022.
Telus still delivered adjusted EBITDA growth of better than 7% last year and is targeting an increase north of 5% in 2024. The board raised the dividend annually for the past two decades, and ongoing hikes should be on the way.
Investors who buy Telus at the current level can get a 7% dividend yield.
The bottom line on top RRSP stocks
TC Energy and Telus pay attractive dividends that should continue to grow. If you have some cash to put to work in self-directed RRSP, these stocks still look cheap and deserve to be on your radar.
