A recovery in the share prices of oversold Canadian dividend stocks could continue for several months, supported by interest rate cuts. Investors who missed the first leg of the bounce are wondering which top TSX dividend stocks are still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on passive income.
TC Energy
TC Energy (TSX:TRP) is up about 20% since the middle of April, rising $10 per share to the current price near $58. This remains way off the $74 the stock reached in 2022 before aggressive rate hikes by the Bank of Canada and the U.S. Federal Reserve triggered a pullback in pipeline stocks.
At the same time, TC Energy faced expensive delays on its 670 km Coastal GasLink pipeline project that saw the budget more than double to an estimated $14.5 billion. The company had to take on extra debt to get the project to the finish line. Fortunately, TC Energy reached mechanical completion on Coastal GasLink late last year and expects commercial operations to begin in 2025.
Management has done a good job of raising cash through the sale of interests in some assets to reduce the debt load. TC Energy brought in $5.3 billion last year through this process and is on track to monetize another $3 billion in 2024. These efforts, along with the planned spin-off of the oil pipelines division, go a long way to shoring up the balance sheet to pursue the rest of the capital program that will see TC Energy invest $6 billion to $7 billion annually over the medium term on growth initiatives.
As new assets go into service, the boost to cash flow should support steady dividend growth. TC Energy raised the distribution in each of the past 24 years. Investors who buy TRP stock at the current level can get a dividend yield of 6.6%.
Enbridge
Enbridge (TSX:ENB) has been up 5% in the past month. At the current price near $51.50, it is closing in on the 12-month high just above $52. Enbridge traded for $59 before the pullback in the second half of 2022, and through the first three quarters of 2023, the stock went as low as $43.
As soon as the U.S. Federal Reserve starts to cut interest rates this stock could take off. Enbridge, like TC Energy, uses debt to fund its large secured capital program along with strategic acquisitions. Lower borrowing expenses will boost net income and can free up more cash for dividends.
Enbridge is in the process of wrapping up the third piece of its US$14 billion acquisition of three natural gas utilities in the United States. The company also purchased an oil export terminal in Texas and acquired an American solar and wind project developer in the past couple of years. Management expects new assets to drive distributable cash flow (DCF) growth of 3% per year into 2026 and then 5% annually for the medium term. This should extend the streak of annual dividend hikes into its third decade.
Investors who buy ENB stock at the current level can get a 7.1% dividend yield.
The bottom line on top stocks for passive income
TC Energy and Enbridge pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA targeting high-yield passive income, these stocks deserve to be on your radar.
