Cuts to interest rates by the Bank of Canada have led to a sharp drop in rates offered by financial institutions on Guaranteed Investment Certificates (GICs). This is driving a rotation of funds back into Canadian dividend stocks that pulled back as interest rates increased in 2022 and 2023. Investors who missed the recent rally are wondering which high-yield TSX stocks might still be undervalued and good to buy for a self-directed portfolio targeting dividend income.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) just announced a deal to take a 14.9% stake in U.S. regional bank KeyCorp (NYSE: KEY) for about US$2.8 billion. The purchase is the first big move into the United States by Bank of Nova Scotia’s new chief executive officer (CEO) as part of the new strategy to focus on growth opportunities in Canada, the United States, and Mexico, compared to expanding the legacy bets on emerging markets in South America.
The market reacted poorly to the decision to make KeyCorp the target. BNS stock slipped about 4% on the news. KeyCorp plunged more than 50% in 2023 from US$20 per share to $9 during the mini-crisis that hit U.S. regional banks. The stock recovered to US$14.50 before the news broke on the Bank of Nova Scotia investment and now trades close to US$15.50.
Markets might be concerned that another rout is on the way for small American banks that could still be overexposed to bad bond bets or commercial real estate. On this front, the cash infusion should help KeyCorp restructure its balance sheet.
It will take time to see if this is a savvy move by Bank of Nova Scotia, and near-term volatility should be expected. However, Bank of Nova Scotia currently looks cheap, trading near $62, and investors can pick up a solid 6.8% dividend yield. The stock was as high as $93 in early 2023, so there is decent upside potential.
Telus
Telus (TSX: T) trades near $22.50 at the time of writing compared to a 12-month low around $20, but the stock was as high as $34 in 2022 before the Bank of Canada ramped up rate hikes. Telus uses debt to fund part of its capital program. The jump in borrowing costs put a pinch on profits, but the company should see that strain ease as rates decline.
Telus has also fallen out of favour due to revenue challenges at its Telus International subsidiary. The division accounts for a relatively small part of overall earnings before interest, taxes, depreciation, and amortization (EBITDA), but the issues forced Telus to trim its guidance last year and will likely result in adjusted EBITDA growth being at the low end of 2024 guidance, according to a recent update from Telus.
Telus is arguably a contrarian pick today. Price wars on the mobile and internet business combined with regulatory uncertainty are headwinds, but Telus still generates good cash flow and the dividend should be safe. In fact, Telus has increased the payout annually for more than two decades.
Investors who buy the stock at the current level can get a 7% dividend yield, so you get paid well to wait for the recovery.
The bottom line on high-yield stocks
Bank of Nova Scotia and Telus are good examples of high-yield TSX stocks that still trade at discounted prices. If you have some cash to put to work in a portfolio focused on passive income and are a patient investor, these stocks deserve to be on your radar.
