2 Canadian Dividend Stocks With Significant Upside Potential

These dividend stocks could soar as interest rates fall.

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A transition back into oversold dividend stocks looks underway as investors bet on continued rate cuts by the Bank of Canada and anticipated reductions to interest rates south of the border. Some top TSX dividend-growth stocks have already made nice moves off the 12-month lows, but more upside should be on the way.

TD Bank

TD (TSX:TD) traded as high as $108 in early 2022 before an extended slide over the past two years brought the stock as low as $74 in June. Bargain hunters moved in over the past few weeks and TD now trades near $81.50.

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Falling interest rates will help borrowers who are struggling to cover the jump in debt costs that occurred as the Bank of Canada and the U.S. Federal Reserve aggressively increased rates in 2022 and 2023. Provisions for credit losses (PCL) at TD and the other banks should stabilize in the coming months and reversals could even be on the way if the economy has a soft landing next year.

TD stock is also down due to operational challenges in the American business. Regulators are investigating TD for not having adequate systems in place to detect and prevent money laundering. TD has set aside an initial US$450 million to cover potential fines. The stock will likely remain under pressure until there is clarity on the total penalties, but TD will eventually get the situation sorted out and the bank has adequate excess capital on hand. TD remains very profitable and currently offers a dividend yield of 5%.

Telus

Telus (TSX:T) trades near $22 at the time of writing compared to $34 in the spring of 2022. The stock is up about 10% in the past month and more gains should be on the way.

Falling interest rates will reduce borrowing expenses in the coming year. This should boost profits and will free up more cash for distributions. Telus uses debt to fund part of its capital program, which includes the expansion of its 5G network.

Telus reduced guidance last summer due to lower revenue at its Telus International (TSX:TIXT) subsidiary and cut 6,000 jobs to bring operating costs in line with market conditions. This put added pressure on the share price, but the reaction was probably overdone. Telus still delivered adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) growth of better than 7% last year and expects 5.5% to 7.5% growth this year, supported by the strength of the core mobile and internet services businesses.

Telus has increased the dividend annually for more than two decades. Investors who buy the stock at the current price can get a 7% dividend yield.

The bottom line on top TSX dividend stocks

Ongoing volatility should be expected and a pullback to the 12-month lows is certainly possible if inflation remains sticky or the economy slips into a deep recession.

However, TD and Telus already look cheap and pay attractive dividends that should continue to grow. If you have some cash to put to work in a contrarian portfolio focused on dividends and total returns, these stocks deserve to be on your radar.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends TELUS. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Telus.

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