Cuts to interest rates are bringing income investors back into top Canadian dividend stocks that sold off over the past two years. Pensioners seeking reliable passive income are wondering which high-yield stocks are still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) portfolio.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades near $64 per share at the time of writing. This is up from the 12-month low of around $55 but is still way off the $93 the stock reached in early 2022.
The share price started to recover late last year as market sentiment shifted from fears of more rate hikes to anticipation of interest rate cuts in 2024. Bank of Nova Scotia and its large Canadian peers significantly increased provisions for credit losses (PCL) in recent quarters as a result of the stress placed on borrowers by the sharp rise in interest rates in 2022 and 2023. The Bank of Canada recently cut its interest rate by 0.5% to 4.5% and analysts anticipate ongoing reduction through next year that could bring the rate back below 3%. This would ease pressure on bank customers who are carrying too much debt and should lead to lower PCL or even provision reversals in the next two years.
Bank of Nova Scotia remains very profitable and has a solid capital position to ride out economic turbulence. Investors who buy the stock at the current price can get a 6.6% dividend yield.
BCE
BCE (TSX: BCE) uses debt to fund part of its capital program, which includes billions of dollars of annual investments in the expansion and upgrading of its wireless and wireline network infrastructure. The sharp rise in interest rates over the past two years drove up borrowing expenses and put a pinch on profits while reducing cash available for distributions.
Rate cuts, along with a restructuring that has reduced staff count by more than 10%, will lower expenses heading into next year. This should help stabilize the situation to enable BCE to hit its financial targets. The company expects 2024 revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be similar to 2023 or slightly higher, so the dividend should be safe.
BCE’s share price fell from $74 in 2022 to a recent 10-year low of around $43. The pullback looks overdone, and bargain hunters have started to move back into the stock. At the current price near $46.50, investors can get an 8.6% dividend yield.
Ongoing volatility should be expected in the near term, but you get paid well to ride it out.
The bottom line on top stocks for passive income
Bank of Nova Scotia and BCE pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA focused on high-yield passive income, these stocks look cheap and deserve to be on your radar.
