TFSA: 2 Dividend Stocks That Could Thrive in 2025

Here’s why these top TSX dividend stocks could rally into next year.

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A transition out of high-flying tech stocks into oversold dividend stocks could be the major story through the end of 2024 and next year. Investors are wondering which top Canadian dividend stocks are still undervalued and good to buy for a self-directed portfolio focused on income and total returns.

Fortis

Fortis (TSX:FTS) is up 7% in the past month on anticipation the Bank of Canada will continue to cut interest rates and with the expectation the U.S. Federal Reserve will start reducing rates in the coming months.

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Fortis, like most utility companies, uses debt to fund part of its growth program. The surge in interest rates in 2022 and 2023 drove up borrowing costs considerably. Rising debt expenses can cut into profits and reduce cash that is available for distributions. Higher borrowing rates can also force companies to shelve projects, which impacts growth.

Fortis saw its share price drop from close to $65 in the spring of 2022 to around $50 last fall as investors worried about the impact of the rate hikes. At the time of writing, the shares are back up to $57, and more upside should be on the way as interest rates decline.

Fortis is working on a $25 billion capital program that is expected to boost the rate base from $37 billion in 2023 to about $49.4 billion in 2028. The resulting bump in cash flow from the new assets should support planned annual dividend increases in the 4-6% range. Investors who buy Fortis at the current price can get a 4.1% dividend yield and wait for the dividend growth to boost the return on the initial investment.

TD Bank

TD (TSX:TD) trades near $80 at the time of writing. The stock is off the 12-month low near $74 but is way below the $108 it reached in early 2022.

Rising interest rates are typically positive for banks due to the impact on net interest margins, but the sharp rise in interest rates over such a short period of time has forced TD and its peers to increase provisions for credit losses (PCL) as borrowers with too much debt struggle to cover higher interest charges.

The Bank of Canada has already cut interest rates by 0.5% and more reductions are expected through next year. This will immediately help holders of variable-rate loans, and the resulting drop in rates for fixed-rate mortgages will ease the pain for homeowners who have to renew loans that were taken at much cheaper rates. As such, PCL should stabilize in the coming quarter and investors could potentially even see reversals at some point next year if unemployment doesn’t surge due to a weakening economy.

TD also has company-specific issues that have hurt the share price. The company is under investigation in the United States for not having adequate systems in place to detect and stop money laundering. TD has already set aside US$450 million to cover potential fines. Analysts speculate the total penalties could go as high as US$4 billion. That’s a big hit, but TD has excess cash to ride out the storm, and it will eventually get the problem fixed.

TD is arguably a contrarian pick, but there is attractive upside potential and you get paid a solid 5% dividend yield at the current share price.

The bottom line on top dividend stocks for 2025

Ongoing volatility should be expected, and a resurgence of inflation could derail the rebound. That being said, Fortis and TD still look cheap right now and pay solid dividends that should continue to grow. If you have some cash to put to work, 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 Fortis. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker has no position in any stock mentioned.

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