A shift from Guaranteed Investment Certificates (GICs) back into high-yield dividend stocks appears to be underway as interest rate cuts by the Bank of Canada force rates on fixed-income investments lower.
Retirees and other income investors who missed the bounce in top TSX dividend stocks are wondering which ones might still be undervalued and good to buy for a self-directed portfolio targeting high yield.
Enbridge
Enbridge (TSX:ENB) trades near $53 at the time of writing. This is off the 12-month low of around $43 it hit last fall, but is still shy of the $59 the stock reached in 2022 before the Bank of Canada and the U.S. Federal Reserve aggressively raised interest rates to get inflation under control.
Bargain hunters started to move back into the stock in November last year as market sentiment shifted from fears of additional rate hikes to anticipation of rate cuts in 2024. Enbridge uses debt to fund its growth initiatives, which include acquisitions and capital projects. A drop in borrowing costs in both Canada and the United States will help boost profits and can free up more cash to reduce debt or cover dividend payments.
Enbridge is in the final stage of completing its US$14 billion acquisition of three American natural gas utilities. These generate steady rate-regulated revenue that will deliver full-year benefits in 2025. In addition, Enbridge is working on a $24 billion capital program that is expected to help boost distributable cash flow by 3% annually through 2026 and by 5% starting in 2027. As a result, investors should see regular dividend increases. The board raised the payout in each of the past 29 years. Investors who buy the stock at the current level can get a dividend yield of 6.9%.
TC Energy
TC Energy (TSX:TRP) traded near $74 at the high point in 2022. As with Enbridge, the stock then went into a slide as investors dumped pipeline names on concerns about rising debt expenses caused by the steep hikes to interest rates. TRP fell to around $45 last October. Since then, the share price has trended higher and is now back to $61. More gains should be on the way.
TC Energy’s 670 km Coastal GasLink pipeline project reached mechanical completion late last year and is scheduled to start delivering natural gas to a new liquified natural gas (LNG) export facility next year. This will be a relief for investors who watched the project’s budget more than double to about $14.5 billion. TC Energy has done a good job of monetizing other assets in Canada and the United States over the past year to shore up the balance sheet. Coastal GasLink also closed a successful $7.15 billion bond sale to refinance loans taken on to get the pipeline finished.
Looking ahead, TC Energy says it plans to spend $6 billion to $7 billion per year over the medium term on remaining capital developments. As new assets go into service, the company should see cash flow grow enough to support ongoing dividend increases.
TC Energy raised the dividend in each of the past 24 years. Investors who buy the stock at the current level can get a dividend yield of 6.3%.
The bottom line on top stocks for passive income
Enbridge and TC Energy pay attractive dividends that should continue to grow. If you have some cash to put to work in a portfolio focused on passive income, these stocks deserve to be on your radar.
