Investors are looking for dividend opportunities heading into 2025. Anticipated ongoing cuts to interest rates could supercharge the shift back into top TSX dividend stocks that pulled back as interest rates rose in 2022 and 2023 and stayed elevated for the first half of this year.
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Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is up about 14% in the past month to $70 per share. The stock actually began its recovery late last year from around $55 when market sentiment started to change from fears of more interest rate hikes to expectations for rate cuts in 2024.
Interestingly, rising interest rates normally benefit banks by boosting net interest margins. The steep increase in rates over such a short period of time, however, put borrowers with too much debt in a bad situation, and that has led to rising provisions for credit losses (PCL) at Bank of Nova Scotia and its peers. The three consecutive cuts to interest rates in recent months by the Bank of Canada should help cap PCL in the coming months, and investors could start to see PCL decline in a meaningful way next year. If the economy doesn’t go into recession and unemployment stays at a reasonable level, PCL reversals might even occur late next year or in 2026.
Bank of Nova Scotia traded as high as $93 in early 2022, so there is decent upside potential. Investors who buy BNS stock at the current price can get a dividend yield of 6%.
Fortis
Fortis (TSX:FTS) trades near $60 at the time of writing. The stock is up about 20% from the 12-month low but is still off the $65 it reached in 2022 before the Bank of Canada and the U.S. Federal Reserve started to aggressively raise interest rates.
Fortis has $69 billion in utility assets spread out across Canada, the United States, and the Caribbean. Utilities tend to carry a lot of debt that is used to fund part of their growth programs. The sharp increase in borrowing costs drove up debt expenses in the past two years. This hurts profits and potentially makes some capital projects or takeover targets less appealing.
The U.S. is expected to begin cutting interest rates this month and will likely extend reductions through next year to help the economy navigate a soft landing. Falling interest rates in both Canada and the United States will lower borrowing costs for Fortis as it pursues its $25 billion capital program. Cheaper debt expenses should boost income and will help free up cash that can be used to cover dividend payments.
Fortis says its capital program will raise the rate base from $37 billion in 2023 to more than $49 billion in 2028. The resulting increase in cash flow should support planned dividend increases of 4% to 6% per year. Fortis has increased the distribution annually for the past 50 years.
The bottom line on top dividend stocks for 2025
Bank of Nova Scotia and Fortis pay attractive dividends that should continue to grow. If you are looking for stocks that should benefit from cuts to interest rates heading into 2025, these stocks deserve to be on your radar.
