Income investors have watched top rates on Guaranteed Investment Certificates (GICs) slide from a high of around 6% last fall to below 4.5% at the time of writing. The downward trend is expected to continue as interest rates drop. The Bank of Canada just cut interest rates by another 0.25%, bringing the total 2024 reduction to 0.75%. More cuts are likely on the way before the end of the year and through 2025.
As a result, investors are moving back into dividend stocks that fell out of favour in 2022 and 2023. Many have already rallied considerably, but investors can still find deals offering attractive yields.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades near $68.50 at the time of writing. The stock was as high as $93 in early 2022, so there is still decent upside potential even after the nice rally off the 12-month low of around $55.
Falling interest rates would normally be negative for banks due to the reduction in net interest margins that can occur as rates decline. However, the market is seeing rate cuts as a net positive in the current environment. Bank of Nova Scotia has steadily increased provisions for credit losses (PCL) over the past year as rate hikes put additional pressure on customers who were struggling to make loan payments.
A steady reduction in interest rates should result in a stabilization of PCL at Bank of Nova Scotia in the coming months as long as unemployment doesn’t surge due to a weakening economy. Despite the headwinds, the bank still delivered solid fiscal third-quarter (Q3) 2024 results and has a strong capital position to ride out any ongoing turbulence.
Investors who buy BNS stock at the current price can get a dividend yield of 6.2%.
Enbridge
Enbridge (TSX: ENB) fell from $59 in June 2022 to around $43 in early October last year. That timeline broadly coincides with the period of aggressive rate hikes implemented by the Bank of Canada and the U.S. Federal Reserve in their efforts to get inflation under control. The rally that has since occurred in Enbridge’s share price began in the fall of last year when market sentiment shifted from fears of additional rate hikes to expectations of rate cuts in 2024. The stock trades near $54.50 at the time of writing.
The U.S. will likely announce a rate cut on September 18, with steady decreases expected to occur over the next year. This will help reduce Enbridge’s borrowing costs south of the border, where it owns significant assets.
Enbridge is in the process of completing the third leg of its US$14 billion acquisition of three natural gas utilities in the United States. The company is also working on a $24 billion capital program. Revenue from the new assets should help drive growth in distributable cash flow over the coming years to support dividend increases. Enbridge raised the distribution in each of the past 29 years. Investors who buy ENB stock at the current level can get a dividend yield of 6.7%.
The bottom line on top stocks for passive income
Bank of Nova Scotia and Enbridge pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA targeting passive income, these stocks deserve to be on your radar.
