Canadian retirees and other income investors are moving back into TSX dividend stocks as rates offered on Guaranteed Investment Certificates (GICs) continue to decline from the 2023 highs. Investors are wondering which stocks still trade at discounted prices and offer high yields.
Telus
Telus (TSX:T) traded as high as $34 per share in 2022 before the Bank of Canada ramped up interest rate hikes to get inflation under control. The stock subsequently went into a prolonged pullback, falling as low as $20 in early July this year. At the time of writing, the stock is around $21.50.
Telus has spent billions of dollars in recent years on network upgrades, including the transition from copper lines to fibre and the rollout of the 5G network. The company uses debt to fund part of its capital program, so interest rate hikes have driven up borrowing expenses.
Relief has arrived. The Bank of Canada already cut interest rates by 0.5% in recent months, and economists expect the central bank to continue lowering rates through the end of next year. This will help Telus reduce debt expenses and should free up cash to support dividend payments.
At the same time, Telus has eliminated roughly 6,000 positions over the past year to help the business meet its financial targets. The company’s international subsidiary, however, is still struggling with revenue declines, so 2024 results will likely come in at the lower end of guidance, but Telus still expects to deliver growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2024.
At the very least, the dividend should be safe heading into 2025. Telus has increased the dividend annually for more than two decades, so investors could even see another modest boost next year.
The stock isn’t without risk. Price wars are putting pressure on margins, and regulators are pushing to force Telus to let competitors use its fibre network, so investors hoping for a big rally in the stock will have to be patient. In addition, an economic downturn in 2025 could potentially send the share price back to the 2024 low.
That being said, the stock already looks cheap, and you will get paid a solid 7.2% dividend yield right now to ride out the headwinds.
Enbridge
Enbridge (TSX:ENB) saw its share price decline from $59 in June 2022 to around $43 in October last year. Since then, the stock has trended higher as investors anticipated interest rate cuts in Canada and the United States. Economists expect the U.S. Federal Reserve to start reducing interest rates as early as next month, and steady cuts are anticipated through next year as the central bank tries to navigate a soft landing for the economy.
Enbridge has significant operations in the United States, so the rate cuts will combine with the reductions in Canada to ease borrowing costs. The pipeline giant uses debt to fund part of its growth program, which includes acquisitions and capital projects. Lower interest expenses should have a positive impact on profits.
Enbridge is in the process of completing its US$14 billion purchase of three natural gas utilities in the United States. The deals make Enbridge the largest natural gas utility operator in North America and position the business to benefit from the surge in natural gas demand that is expected in the coming years from growth in the construction of gas-fired power facilities required to meet rising electricity demand from artificial intelligence data centres and electric vehicles.
Enbridge’s oil pipelines and the oil export terminal remain core assets, along with the expanding renewable energy portfolio.
The board has increased the dividend annually for the past 29 years. Ongoing dividend growth should be in the 3% to 5% range, in step with anticipated expansion of distributable cash flow. Investors who buy Enbridge at the current level can get a dividend yield of 6.9%.
The bottom line on top stocks for passive income
Telus and Enbridge pay attractive dividends that should continue to grow. If you have some cash to put to work in a portfolio targeting passive income, these stocks deserve to be on your radar.
