The TSX currently trades near its record high. Investors who missed the rally this year are wondering which top Canadian dividend stocks might still be undervalued and good to buy heading into 2025.
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TD Bank
TD (TSX:TD) is down about 10% in recent days after news broke that the bank would be fined roughly US$3 billion and will have its growth prospects clipped in the United States. The decision by U.S. regulators follows their investigations into TD over the past year or so regarding lapses in TD’s systems for identifying and preventing money laundering at its American operations.
The monetary penalty is about where the bank and the market expected based on the US$3 billion in provisions TD had already booked related to the issue. Investors had hoped the fine would be the end of the story, but TD is also being hit with an asset cap that limits its expansion in the United States. The bank pursued an aggressive acquisition strategy in the United States over the past 20 years buying assets from Maine right down the coast to Florida. Putting the brakes on U.S. growth over the medium term will restrict TD’s ability to expand revenue and profits.
The upside for investors is that the uncertainty is now resolved and TD remains very profitable, supported by the Canadian operations. A new CEO is set to take control in 2025 as part of TD’s effort to turn the page on this difficult chapter of its long history.
Near-term volatility is expected, but the stock price should stabilize soon. Falling interest rates in Canada and the United States will help ease pressure on struggling borrowers next year. That should lead to lower provisions for credit losses.
Investors with a contrarian strategy might want to consider buying TD on the latest dip. At the time of writing, the stock provides a 5.2% dividend yield.
BCE
BCE (TSX:BCE) is another TSX giant that has fallen on hard times over the past two years. The stock currently trades near $45 compared to $74 at the high point in 2022. Soaring interest rates are largely to blame for the pain. BCE uses debt to fund part of its capital program, which includes the expansion and upgrade of its vast wireline and wireless networks. Higher borrowing costs put a dent in profits and can reduce cash that is available for dividends.
BCE raised the dividend by about 3% in 2024. This is smaller than the average 5% annual increase that investors received in the previous 15 years. A dividend hike for 2025 might not occur, given the current 8.8% dividend yield and the social pressures placed on management after BCE cut more than 10% of its staff over the past year.
Price wars, weak advertising revenue in the media business, and regulatory uncertainty have contributed to the slide in the stock price. At this point, however, the shares might be oversold. BCE’s dividend should be safe, even if it doesn’t increase. The company expects 2024 revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be in line with last year, or slightly higher.
Falling interest rates and lower operating costs in 2025 will help the bottom line. If price competition eases up and the economy remains stable, BCE stock could catch a new tailwind next year.
In the meantime, investors get paid well to wait.
The bottom line on contrarian dividend stocks
TD and BCE pay attractive dividends that should be safe, and the stocks deserve to be on your radar at these levels. Additional downside is certainly possible, so investors might want to take a half position and wait to see what happens in the next few months.
