The TSX is near a record high, but investors can still find good Canadian dividend stocks trading at discounted prices. Buying stocks when they are out of favour takes courage and requires the patience to ride out additional turbulence, but the strategy can boost dividend yields and potentially deliver attractive long-term total returns.
TD Bank
TD Bank (TSX:TD) trades for close to $81.50 at the time of writing compared to $108 at one point in early 2022.
Soaring interest rates in 2022 and 2023 put pressure on bank stocks until last fall when market sentiment shifted from fear of more increases to the anticipation of rate cuts in 2024. This led to a rally late last year that has continued for some banks through 2024. Lower interest rates will ease pressure on companies and households with too much debt. As a result, provisions for credit losses (PCL) are expected to decline across the bank industry in the coming quarters.
TD, however, is facing some specific issues that have been an extra headwind for the stock. The bank is under investigation in the United States for not having adequate systems in place to identify and block money laundering. TD has set aside roughly US$3 billion to cover potential fines. The hit is significant, and TD reduced some of its ownership in Charles Schwab to cover the provisions. Management says the amount set aside to this point is close to where it expects final penalties to land.
Analysts speculate TD might also be forced to scale back its U.S. growth ambitions, so there is still some risk for investors. That being said, TD will eventually get it all sorted out, and the bank remains very profitable. Investors who buy TD at the current level can get a 5% dividend yield.
Telus
Telus (TSX:T) is another contrarian TSX stock pick to consider today. The share price was as high as $34 in 2022. At the time of writing, Telus trades for less than $23. Rising interest rates are to blame for much of the pain. Telus uses debt to fund part of its growth program, which includes investments in wireless and wireline communication networks like 5G and fibre optic lines. The surge in borrowing costs has put a dent in profits. Recent rate cuts by the Bank of Canada will lead to lower borrowing expenses in the coming quarters. This should free up more cash to reduce debt and pay dividends.
On the operational side, Telus International is struggling with weaker-than-expected revenue. This forced Telus to reduce guidance in 2023 and continues to put some pressure on overall financial performance. Telus cut staff count by roughly 6,000 over the past year to position the business to succeed in the current environment. Price wars and regulatory uncertainty have also impacted investors’ sentiments.
That being said, Telus still expects to deliver growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2024 compared to last year. The other subsidiaries (Telus Health and Telus Agriculture & Consumer Goods) have the potential to drive meaningful growth in the coming years.
Investors who buy Telus at the current level can get a dividend yield of 6.8%.
The bottom line on top discounted stocks
Near-term volatility is expected, but TD and Telus pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed portfolio, these stocks deserve to be on your radar.
