The rebound in the share prices of Canadian dividend stocks could extend well into next year as the Bank of Canada looks set to cut interest rates even further in an effort to avoid a recession. Investors who missed the rally so far are wondering which TSX dividend stocks might still be undervalued and good to buy for a self-directed Registered Retirement Savings Plan (RRSP) portfolio.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades near $73 per share at the time of writing. The stock is up more than 20% in the past year but is still way off the $93 it reached in early 2022.
Bank stocks came under pressure when soaring interest rates in 2022 and 2023 stoked fears that a major economic downturn would have to occur for the Bank of Canada and the U.S. Federal Reserve to get inflation under control. In the worst-case scenario, higher borrowing expenses combined with a spike in unemployment would potentially trigger a wave of loan defaults by commercial and residential borrowers.
Bank of Nova Scotia has increased its provisions for credit losses (PCL) in the past few quarters to account for the stress being felt by clients with too much debt. Rate cuts should lead to lower PCL in 2025 as long as the economy sees a soft landing next year.
At the same time, staff cuts put in place last year reduced expenses, and Bank of Nova Scotia has a solid capital position to ride out any economic turbulence. Under its new strategy, the bank is focusing its growth spending on the United States, Canada, and Mexico rather than on South America. This could attract new interest in the stock from investors who avoided Bank of Nova Scotia in the past. Investors who buy BNS stock at the current level can get a dividend yield of 5.8%.
Fortis
Fortis (TSX: FTS) raised its dividend in each of the past 50 years and intends to boost the distribution by 4-6% annually through at least 2028. That’s good guidance in uncertain economic conditions.
The company owns and operates $69 billion in utility assets across Canada, the United States, and the Caribbean. Businesses include natural gas distribution utilities, power generation sites, and electricity transmission networks. Fortis is working on a $25 billion capital program that will increase the rate base from $37 billion in 2023 to $49.4 billion in 2028. This will drive cash flow growth to support the dividend hikes. Acquisitions could boost the dividend-growth outlook. Fortis hasn’t made a large acquisition in several years, but declining interest rates could lead to a new round of consolidation in the utility sector.
Fortis trades near $61 per share at the time of writing. The stock is up 20% in the past year, but is still below the $65 it reached in 2022.
The bottom line on RRSP dividend stocks
Bank of Nova Scotia and Fortis pay good dividends that should continue to grow. If you have some cash to put to work in your RRSP, these stocks deserve to be on your radar.
