Investors who missed the rally in the TSX this year are wondering which top dividend stocks might still be undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
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BCE
BCE (TSX: BCE) has been on a rough ride for the past two years. The stock slipped from $74 in 2022 to as low as $43 in July this year and currently trades near $46.50. Cuts to interest rates by the Bank of Canada are now bringing bargain hunters off the sidelines and more upside could be on the way.
BCE uses debt to pay for a large chunk of its capital investments, which include expanding and upgrading the wireline and wireless network infrastructure. Soaring interest rates in 2022 and 2023 drove up interest expenses. This put pressure on profits and reduced cash available for distributions and debt reduction.
BCE raised the dividend by about 3% in 2024, which was less than the usual 5% gain investors received on average over the previous 15 years. It is possible that there will be no increase for 2025, given that the current yield is about 8.6%.
On the upside, BCE recently announced a deal to sell its stake in Maple Leaf Sports and Entertainment (MLSE) for $4.7 billion. The sale is expected to close in 2025 and will give BCE a large cash infusion to reduce debt and shore up the balance sheet. In addition, BCE cut staff by more than 10% over the past year. The drop in operating costs, along with lower debt expenses due to falling interest rates, should support the bottom line next year.
BCE expects 2024 revenue and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) to be similar to 2023 or slightly higher. As such, the stock is probably oversold at this level.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) trades near $74 per share at the time of writing. The stock is already up about 26% in the past year, but still trades way below the $93 it reached in early 2022.
Falling interest rates should lead to reduced provisions for credit losses (PCL) at Bank of Nova Scotia in the coming quarters as borrowers who are struggling with the jump in interest rates in the past year get some respite. As long as the economy holds up and unemployment doesn’t surge, investors could even start to see PCL reversals in late 2025 or 2026.
Bank of Nova Scotia is ramping up its growth strategy in the United States. The bank recently made a US$2.8 billion investment to acquire a 14.9% stake in KeyCorp, an American regional bank. In addition, the new management team at Bank of Nova Scotia sees opportunities to expand in Quebec. In the past, much of the growth in investments went to the international operations, including acquisitions in Mexico, Peru, Chile, and Colombia. The new CEO still sees Mexico as an important market, but the businesses in South America will not receive as much capital and could potentially be monetized in the coming years with proceeds directed to other growth opportunities.
Investors who buy BNS stock at the current price can get a dividend yield of 5.8%, so you get paid well to wait for the turnaround efforts to deliver results.
The bottom line on top TSX dividend stocks
BCE and Bank of Nova Scotia pay attractive dividends that should be safe. If you have some cash to put to work, these stocks still look cheap and deserve to be on your radar.
