Canadian pensioners are always looking for ways to get better returns on their hard-earned savings. The decline in rates offered on Guaranteed Investment Certificates (GICs) in recent months is driving a transition of funds back into top TSX dividend stocks that pulled back as interest rates increased.
Investors who missed the rally that has occurred can still find decent deals for a self-directed Tax-Free Savings Account (TFSA) portfolio focused on passive income.
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BCE
BCE (TSX: BCE) is arguably a contrarian pick right now. The stock took a beating over the past two years as rising interest rates drove up borrowing expenses. This reduced profits and cut into cash that can be paid out as dividends. The jump in debt expenses is part of the reason the board only raised the dividend by 3.1% in 2024 compared to an average increase of about 5% over the previous 15 years.
At the same time, BCE is facing market and regulatory challenges. The media division sold or closed dozens of radio stations and trimmed television content to lower expenses amid a decline in advertising revenue. Price wars for mobile and internet plans have put a pinch on margins in the core wireless and wireline network operations. In early next year, the government intends to force BCE to provide competitors with access to its fibre network.
On the positive side, BCE has done a good job of reducing expenses to align the business with the current market condition. Management still expects 2024 adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to rise by as much as 4.5% compared to last year. Revenue is expected to be flat to 4% higher despite the headwinds.
Based on the guidance, the stock is likely oversold. Barring any major revenue drop, the dividend should be safe. Falling interest rates will help BCE retain more cash next year.
Investors who buy BCE at the current share price near $47 can get a dividend yield of 8.5%.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades near $66 per share at the time of writing. That’s off the 12-month low of around $55, but is still way down from the $93 the stock reached in early 2022.
High interest rates typically help banks by boosting net interest margins, but the steep rise in rates that occurred over such a short period of time has put more borrowers in a tight spot as their debt expenses jumped on variable rate loans or they were forced to renew fixed mortgages at much higher rates. The recent reduction in interest rates by the Bank of Canada will start to ease the pain.
Bank of Nova Scotia’s provisions for credit losses (PCL) in the fiscal third quarter (Q3) of 2024 increased compared to the same period last year and were higher than the previous quarter. PCL should start to stabilize in the next quarter or two, and anticipated rate cuts by the Bank of Canada through next year will likely lead to PCL reductions or even reversals if the economy sees a soft landing.
Bank of Nova Scotia’s new growth strategy of focusing on the U.S., Canada, and Mexico instead of Peru, Chile, and Colombia will take time to deliver results, but the transition could start to attract investors who have avoided the stock due to concerns about the economic and political stability of the South American countries.
Investors will need to be patient, but BNS stock looks reasonable at the current price, and you will get paid a 6.4% dividend yield to wait for the recovery.
The bottom line on top stocks for passive income
BCE and Bank of Nova Scotia pay attractive dividends for a TFSA portfolio focused on passive income. If you have some cash to put to work, these stocks deserve to be on your radar.
