Market sentiment on dividend stocks started to shift last fall from selling on fears of higher interest rates to bargain hunting based on anticipation of rate cuts in 2024. The Bank of Canada has already reduced interest rates twice, and more cuts are expected. The U.S. Federal Reserve could start cutting rates as early as September.
Investors who missed the bounce in the share prices of some top TSX dividend stocks can still find good value with attractive yields. A new tailwind is likely coming for dividend payers as interest rates continue to fall.
CIBC
CIBC (TSX:CM) just reported positive fiscal third-quarter (Q3) 2024 results. The stock is up 6% on the news at the time of writing and trades at its highest level in more than two years.
Investors are cheering the progress the bank has made in reducing its commercial real estate risks in the American business. CIBC also reported a 13% jump in revenue compared to the same period last year and a 28% gain in adjusted net income to $1.9 billion. Adjusted return on equity rose to 14% from 12%. Investors are also pleased to see a meaningful drop in provisions for credit losses (PCL). The money set aside to cover potential bad loans in fiscal Q3 2024 compared to fiscal Q3 2023 dropped by $253 million to $483 million. CIBC continues to maintain a comfortable capital cushion with a common equity tier-one (CET1) ratio of 13.3%.
Falling interest rates will put pressure on net interest margins, but they will also help homeowners and businesses who are carrying too much debt. CIBC has a large Canadian residential mortgage portfolio relative to its size, so the drop in interest rates will ease investor concerns about a potential wave of defaults. As long as unemployment doesn’t surge, PCL should continue to decline.
Investors who buy CM stock at the current price can pick up a 4.6% dividend yield.
TC Energy
TC Energy (TSX:TRP) uses debt to fund part of its capital program. The projects often cost billions of dollars to build and can take years to complete. A good example is the 670 km Coastal GasLink pipeline that received the green light in 2018 with an expected budget of less than $7 billion. TC Energy finally reached mechanical completion on the project late last year, with a total cost of roughly $14.5 billion.
TC Energy took on extra debt to get the project completed. The sharp rise in interest rates in 2022 and 223 drove up borrowing costs. This is largely why the stock fell from $74 in June 2022 to as low as $45 last fall.
Coastal GasLink is now on track to start commercial operation next year, and TC Energy has successfully monetized, or is in the process of selling, roughly $8 billion in non-core assets to shore up the balance sheet. Interest rates are falling, and TC Energy still has a steady growth program on the go to the tune of $6 billion to $7 billion in capital investments per year over the medium term.
The stock is back up to $61. More gains should be on the way. Investors who buy at the current level can pick up a solid 6.25% dividend yield.
The bottom line on top dividend stocks
CIBC and TC Energy are good examples of dividend stocks that should benefit from falling interest rates over the next two years. If you have some cash to put to work, these stocks deserve to be on your radar.
