Dividend stocks are back in the sights of TSX income investors who shifted to fixed-income alternatives, such as guaranteed investment certificates (GICs), over the past two years.
Investors who missed the latest rally in the share prices of many of the top Canadian dividend stocks are wondering which ones might still be undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on generating reliable passive income.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) trades near $74 per share at the time of writing. The stock is up about 30% in the past year, but remains well below the $93 it reached in early 2022 before the big pullback began amid fears that rate hikes would trigger a recession.
The economic crash that some economists predicted hasn’t materialized and might not occur. In fact, most economists now anticipate a soft landing for the economy. Recent rate cuts by the Bank of Canada will help companies and households carrying too much debt. This should lead to lower provisions for credit losses (PCL) at Bank of Nova Scotia in the coming quarters. Lower PCL frees up more cash that can be used to grow the business. If the economy holds up and fewer borrowers than expected default on loans, investors might even see PCL reversals late next year or in 2026.
Bank of Nova Scotia currently offers a dividend yield of 5.8%, the highest among the big Canadian banks. As long as rate cuts continue as expected through next year and unemployment doesn’t surge, Bank of Nova Scotia’s shareholders should see more upside.
Fortis
Fortis (TSX:FTS) doesn’t provide the highest yield on the TSX, but the reliability of the dividend growth and outlook for distribution expansion makes the stock attractive, even with the current yield at 4%.
Fortis recently announced a 4.2% dividend increase. This is the 51st consecutive annual hike to the distribution. Investors should see the streak extend in the coming years. Fortis updated its five-year capital program, which will see the business invest $26 billion on new projects. The rate base is expected to rise from about $39 billion in 2024 to $53 billion in 2029. As the new assets are completed and go into service the jump in revenue and cash flow should support planned annual dividend increases of 4% to 6%.
Falling interest rates will make borrowing cheaper for Fortis in 2025 and in the coming years. Lower funding costs could give management confidence to move ahead with additional projects that are currently under consideration. Falling interest rates should also reduce debt expenses and will help free up more cash for debt reduction or distributions to shareholders.
The bottom line on top TSX stocks for passive income
Bank of Nova Scotia and Fortis are good examples of TSX stocks paying attractive dividends that should continue to grow. If you have some cash to put to work in a portfolio focused on passive income, these stocks deserve to be on your radar.
