Canadian investors with self-directed Registered Retirement Savings Plan (RRSP) accounts are looking for TSX stocks that pay reliable dividends to add to their portfolios. Recent cuts to interest rates by the bank of Canada could provide an extra tailwind for dividend stocks heading into 2025.
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Fortis
Fortis (TSX: FTS) is a good example of a dividend stock that should benefit as interest rates decline in Canada and the United States. The utility company uses debt to fund part of its growth program. A sharp jump in interest rates in 2022 and 2023 drove up borrowing costs, which is the main reason investors unloaded the stock as they worried that higher debt expenses would hurt profits and reduce cash which can be used for dividends.
With interest rates now moving lower, Fortis should be able to borrow at more favourable rates. This will help the bottom line and can potentially enable the company to add more projects to the pipeline.
Fortis is already working on a $26 billion five-year capital program. The investments will raise the rate base from $38.8 billion in 2024 to $53 billion in 2029. As new assets go into service, there should be a steady boost to revenue and cash flow. This will help support planned dividend increases of 4% to 6% per year through 2029.
Fortis just raised the dividend by 4.2%, marking the 51st consecutive annual dividend increase from the company. Investors who buy the stock at the current price can get a dividend yield of 4%. There are other stocks that offer higher yields, but the annual dividend growth is tough to ignore, and each distribution hike increases the return on the initial investment.
Bank of Nova Scotia
Bank of Nova Scotia (TSX: BNS) underperformed its peers in recent years, but a turnaround plan launched by the new CEO could rekindle investor interest in the stock. The company is focusing its new growth investments primarily on the United States and Canada. Under previous management, Bank of Nova Scotia spent billions of dollars on acquisitions in Peru, Chile, and Colombia, as well as Mexico. The international businesses will remain part of the portfolio for the near future, but some could be monetized at some point with funds redirected at different opportunities.
Bank of Nova Scotia’s US$2.8 billion investment this year in a 14.9% stake in KeyCorp, a U.S. regional bank, is an example of the type of deals that could be on the horizon. The bank also recently created a new executive position to focus on growing Bank of Nova Scotia’s business in Quebec.
Bank of Nova Scotia trades near $72 at the time of writing. The stock is up about 27% in the past year, but still sits well below the $93 it reached in early 2022. Falling interest rates should lead to lower provisions for credit losses (PCL) in the coming quarters as borrowers with too much debt get a bit of a break on interest charges.
The turnaround plan will take time to deliver results. Investors, however, who buy BNS stock at the current level can get a dividend yield of 5.9% while they wait.
The bottom line on dividend stocks for RRSP investors
Fortis and Bank of Nova Scotia pay attractive dividends that should continue to grow. If you have some cash to put to work in a buy-and-hold portfolio targeting dividends and total returns these stocks deserve to be on your radar.
