Recent cuts to interest rates by the Bank of Canada and the U.S. Federal Reserve are driving investor funds back into dividend stocks that took a beating when rates rose in 2022 and 2023. Tax-Free Savings Account (TFSA) investors who missed the bounce are wondering which TSX stocks might still be undervalued for a portfolio focused on dividends and passive income. Here are two.
Telus
Telus (TSX:T) trades near $22 at the time of writing. This is off the 12-month low around $20, but is still significantly under the $34 it reached in 2022.
Telus uses debt to fund its large capital projects, including the expansion of the fibre optic and 5G networks. Higher interest rates drive up borrowing expenses, reducing profits and cutting into cash that can be used for distributions. The sharp increase in interest rates that occurred over such a short period of time is largely responsible for the pullback in the share price. However, Telus has also struggled with declining revenue in its Telus Digital (TSX:TIXT) subsidiary. Price wars in the communications segment have had an impact, as well.
Despite the headwinds, Telus still expects to generate growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2024. Based on this outlook, the stock is probably oversold.
Extensive staff cuts over the past year have reduced expenses. Falling interest rates should provide additional earnings support in 2025. Investors who buy Telus stock at the current level can get a dividend yield of 7%.
TD Bank
TD (TSX:TD) ran into trouble with U.S. regulators in the past year for not having adequate systems in place to detect and prevent money laundering. The Canadian bank has a large retail banking presence in the United States that it built up over the past 20 years through a series of acquisitions.
TD’s share price is currently around $86, compared with $108 in early 2022. Some of its Canadian peers are now trading near multi-year highs. Investors have avoided TD stock due to concerns around large penalties and a potential ban on acquisitions in the U.S. market, where TD sees good growth potential.
TD has already set aside more than U$3 billion to cover anticipated fines related to the U.S. investigations. Management has indicated that the company expects this to be adequate once the whole process gets finalized. That suggests there might be light at the end of the tunnel. A total ban on U.S. growth is unlikely. Eventually, TD will get the situation sorted out and should be able to focus once again on expanding the U.S. business.
TD remains very profitable, even with all the distractions. Bargain-hunters started buying TD stock in June around $74. More gains should be on the way once the U.S. uncertainty is clarified. Investors who buy at the current level can get a decent dividend yield of 4.7% and simply wait for the recovery.
The bottom line on top stocks for passive income
Telus and TD pay good dividends that should continue to grow. If you have some cash to put to work, these stocks still look oversold and deserve to be on your radar.
