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Money is flowing back into TSX dividend stocks as Bank of Canada rate cuts push down rates on fixed-income alternatives. Investors who missed the rebound are wondering which top Canadian dividend stocks are still undervalued and worth owning for a self-directed tax-free savings account (TFSA) focused on passive income.
Enbridge
Enbridge (TSX:ENB) fell from $59 in June 2022 to as low as $44 in October last year. At the time of writing, Enbridge is trading at around $53 per share.
The decline largely followed the period of the most aggressive rate hikes in Canada and the United States. In fact, the recovery began around the time when market sentiment shifted from fear of further rate hikes to expectations of rate cuts in 2024. The latest phase of the recovery was driven by consecutive 0.25% rate cuts in Canada. In the United States, economists widely expect the Federal Reserve to begin cutting rates as early as next month.
Enbridge finances part of its growth program, which includes acquisitions and investment projects, through debt. When interest rates fall, borrowing costs fall, which in turn contributes to higher profits. Lower borrowing costs also free up more cash that can be used to pay dividends or strengthen the balance sheet.
Enbridge is in the process of completing the third part of its $14 billion purchase of three U.S. natural gas utilities. These companies generate reliable and predictable cash flow from rate-regulated assets. Enbridge is also working on a $24 billion secured capital program to generate additional revenue and cash flow growth.
Global oil and natural gas demand is expected to remain stable for decades to come, even as the world transitions to renewable energy. Enbridge’s investments in oil export infrastructure and liquefied natural gas (LNG) exports put the company in a good position to benefit. The company transports 30% of the oil produced in Canada and the United States and about 20% of the natural gas consumed by Americans.
Enbridge has increased its dividend every year for the past 29 years. Expected annual growth in distributable cash flow is 3% through 2026 and 5% from 2027, so steady dividend increases are expected.
Investors who buy ENB shares at the current price can earn a dividend yield of almost 6.9%.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is trading at $64.50 at the time of writing. The stock is up from $55 last October, but is still well below the $93 it reached in early 2022.
Rising interest rates are putting pressure on businesses and households that are over-leveraged. As a result, the Bank of Nova Scotia and its partners have been increasing provisions for loan losses (PCL) in recent quarters to cover potential defaults. Lower interest rates should lead to a stabilization of PCL in the coming months and a PCL reduction or even reversal next year, provided unemployment does not skyrocket.
Expectations of interest rate cuts led to a recovery from November 2023 to the end of March this year. The decline over the past five months is due to smaller-than-expected rate cuts by the Bank of Canada and a delay in rate cuts by the American central bank. Fears of a recession have also gripped bank investors.
While volatility is to be expected in the short term, Bank of Nova Scotia remains highly profitable and already appears cheap at current levels. Additionally, investors can earn a decent dividend yield of 6.6% while weathering potential further turbulence.
The conclusion on the top dividend stocks on the TSX
Enbridge and Bank of Nova Scotia pay attractive dividends that should continue to grow. If you’re looking to put some money away in a TFSA for passive income, these stocks should be on your radar.
