Canadian investors who missed the bounce in the share prices of some top TSX dividend stocks are wondering which top dividend names are still undervalued and good to buy for a self-directed Registered Retirement Savings Plan (RRSP) portfolio focused on total returns.
CIBC
A recent report from Canadian Imperial Bank of Commerce (TSX:CM) says the bank expects Canadian investors to shift roughly $220 billion back into dividend stocks as interest rate cuts drive down rates offered on fixed-income alternatives. CIBC itself has already picked up a nice tailwind on the anticipation of rate cuts, and more gains should be on the way.
The stock trades near $72 per share at the time of writing compared to less than $50 in October last year, but the share price is still well below the $82 it reached in early 2022.
CIBC’s large relative exposure to the Canadian housing market makes it more sensitive to changes in mortgage rates. As interest rates soared in 2022 and 2023, investors worried that the bank would be hit by a wave of loan defaults. Provisions for credit losses (PCL) at CIBC and the other large Canadian banks have increased in recent quarters but remain relatively small compared to the size of the overall loan book. Expectations of rate cuts in 2024 sparked the rally in the stock through the end of 2023. The two reductions in interest rates by the Bank of Canada in recent months will likely be followed by more cuts through the end of the year now that inflation is down to 2.5%, extending the trend toward the central bank’s 2% target.
At this point, the larger concern is the risk of a serious recession. Falling interest rates help households renew mortgages at better rates, but a surge in unemployment could still drive up loan losses. As such, the banks are still not without risk, but investors who buy CIBC at the current level can get a solid 5% dividend yield to ride out any additional turbulence.
Enbridge
Enbridge (TSX:ENB) trades near $53 at the time of writing compared to $59 at the high point in 2022. As with CIBC, the stock started to recover from the 2023 losses in the fall last year as market sentiment shifted from fears of additional rate hikes to expectations for cuts in both Canada and the United States. The U.S. Federal Reserve hasn’t reduced its target rate yet this year, but markets are pricing in a cut as early as next month, and several more reductions are anticipated heading into 2025.
Enbridge uses debt to fund part of its growth program. The reduction in interest rates will reduce borrowing expenses and should free up more cash for distributions to shareholders. In addition, Enbridge is wrapping up its US$14 billion purchase of three natural gas utilities in the United States and has $24 billion in secured capital projects on the go that will boost cash flow in the coming years.
Enbridge raised the dividend in each of the past 29 years. Ongoing annual gains in the 3-5% range should be on the way, in line with anticipated growth in distributable cash flow. Investors who buy ENB stock at the current level can get a dividend yield near 6.9%.
The stock could pull back a bit after the nice bounce that occurred over the past two months, but any meaningful dip should be viewed as an opportunity to add to the position.
The bottom line on RRPS dividend stocks
CIBC and Enbridge are good examples of stocks paying attractive dividends that should continue to grow. If you have some cash to put to work in a self-directed RRSP focused on high-yields and total returns, these stocks deserve to be on your radar.
