Interest rate cuts by the Bank of Canada are pushing investors back into dividend stocks as rates offered on Guaranteed Investment Certificates (GICs) decline. Investors who missed the bounce in some top dividend names are wondering which TSX dividend-growth stocks are still undervalued and good to buy for a portfolio focused on passive income.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) trades near $73.50 at the time of writing compared to $93 at one point in early 2022. The stock is off the 12-month low of about $55 and more gains should be on the way.
Falling interest rates will put pressure on net interest margins at banks, but the drop in loan defaults should more than offset the margin squeeze. Bank of Nova Scotia and its peers raised provisions for credit losses (PCL) considerably in recent quarters due to the sharp spike in interest rates. Businesses and households with too much debt have struggled to cover the big jump in interest charges, leading to the risk of significant defaults. As interest rates pull back, troubled borrowers will get some relief, and investors should see PCL start to decline through 2025. This will boost profits and can free up more cash for dividend payments.
Bank of Nova Scotia is working through a strategy transition that will see the company invest more in the United States, Canada, and Mexico instead of pursuing opportunities in South America, where the bank invested billions over the past two decades to build businesses in Chile, Colombia, and Peru. Investors have not benefitted as much as hoped from the emerging market bets. The recent US$2.8 billion deal to take a 14.9% stake in KeyCorp, a regional U.S. bank, is an indication of where Bank of Nova Scotia wants to grow in the coming years.
Investors who buy at the current level get paid a solid 5.8% dividend yield to wait for the strategy shift to deliver results.
Telus
Telus (TSX:T) has increased its dividend annually for more than 20 years. Ongoing increases might not be as large, but investors can now get a 6.9% dividend yield.
Telus saw its share price slide from $34 in 2022 to as low as $20 this past summer. At the time of writing, the stock trades near $22.50. Rising interest rates are largely to blame for the pullback, although Telus is also dealing with revenue declines at its Telus Digital subsidiary.
With interest rates now falling, Telus should see borrowing costs decline in the next year. This will help free up more cash for distributions or debt reduction. At the same time, the company’s extensive payroll cuts that occurred over the past year have reduced operating costs and can help support profits.
Telus expects 2024 financial results to come in at the lower end of guidance due to the ongoing challenges at Telus Digital, but the company still expects to deliver growth in adjusted earnings before interest, taxes, depreciation, and amortization compared to last year. As such, the stock might be undervalued at this level.
The bottom line on TSX dividend stocks for passive income
Bank of Nova Scotia and Telus pay attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed portfolio targeting passive income, these stocks deserve to be on your radar.
