The TSX is trading near a record high after a strong rally in 2024. Investors seeking dividends for passive income are wondering which stocks might be good to buy on the next dip.
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Enbridge
Enbridge (TSX:ENB) trades near $60 per share at the time of writing compared to $47 a year ago. The rebound erased all the losses in the pullback that occurred through the second half of 2022 and most of 2023. In fact, Enbridge recently hit a multi-year high.
The correction occurred largely as a result of rising interest rates in Canada and the United States. Enbridge uses debt to finance part of it growth program that includes acquisitions and development projects. The sharp increase in borrowing costs triggered concerns among investors that Enbridge might have to reduce its dividend due to the negative impact on cash flow.
Bargain hunters started to buy the stock last fall when the U.S. Federal Reserve and the Bank of Canada signalled that they were done raising interest rates to get inflation under control. In recent months, the central banks started reducing interest rates to avoid driving the economy into a recession. These rate cuts have supported the rebound in Enbridge’s share price.
Looking ahead, more rate cuts are expected in both countries through next year. That being said, the recent uptick in inflation, a solid economy, and uncertainty about the potential impacts of planned tariffs in the United States could force the central banks to put rate cuts on hold. If the market senses that rates won’t go lower or could move higher, Enbridge and other pipeline stocks could give back some of their big gains.
Enbridge is working on a $24 billion capital program and recently completed its US$14 billion purchase of three natural gas utilities in the United States. Revenue and cash flow from the new assets should support ongoing dividend growth. Investors who buy ENB stock at the current price can get a dividend yield of 6%.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) trades near $79.50 at the time of writing compared to $59 a year ago. The rally really picked up steam in the past three months as the central banks cut interest rates. Bank of Nova Scotia raised its provisions for credit losses (PCL) over the past year as customers with too much debt ran into trouble as interest rates soared. Borrowers with variable-rate loans face an immediate hit, and those with fixed-rate mortgages are being forced to renew at higher rates.
The reductions in interest rates by the central banks have eased the pressure for variable-rate loans. This should lead to lower PCL at Bank of Nova Scotia in the coming quarters.
That being said, fixed-rates mortgage rates are determined by bond yields. These have also declined from the 2023 peak but remain elevated. In fact, bond yields have trended higher over the past two months, with a pullback only occurring in the past week. If bond yields extend their surge in the coming months, Canadian bank stocks might start to come under pressure. Approximately one million fixed-rate mortgages taken out at record-low rates in 2020 are coming due in 2025 in Canada. If rates move higher, there could be a jump in defaults, especially if the economy weakens and unemployment jumps.
At the current share price, BNS stock provides a dividend yield of 5.3%.
The bottom line on top TSX dividend stocks
Enbridge and Bank of Nova Scotia pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks deserve to be on your radar when the market hits its next correction.
