Canadian pensioners and other dividend investors are using their Tax-Free Savings Account (TFSA) to create portfolios of top TSX dividend-growth stocks that can generate reliable tax-free streams of passive income. The market correction is giving investors an opportunity to buy great Canadian dividend stocks at cheap prices.
TD Bank
TD (TSX:TD) is Canada’s second-largest bank with a current market capitalization near $149 billion. The stock trades for close to $82 per share at the time of writing. That’s down from $93 in February and $109 in early 2022.
The steep pullback in recent months has occurred as a result of high-profile bank failures in the United States and rising fears that more carnage could be on the way.
Soaring interest rates designed to cool off the economy and the jobs market could create a deeper recession than is anticipated. High borrowing costs are already putting many over-leveraged businesses at risk of default and a jump in unemployment could lead to trouble in the mortgage market.
TD has large U.S. operations along with its Canadian business. The bank actually just abandoned its planned US$13.4 billion takeover of First Horizon, a U.S. regional bank.
Ongoing volatility should be expected, and a lower share price is certainly possible in the near term. That being said, TD is a very profitable company and looks cheap at the current multiple of roughly 10 times trailing 12-month earnings.
TD has increased the dividend by a compound annual rate of better than 10% over the past 25 years. A generous hike to the base dividend or even a special payout could be on the way in 2023 now that TD is sitting on excess cash that was set aside for the cancelled acquisition. Additional share buybacks are also possible, and TD might find a new acquisition target in a different market to boost long-term growth.
At the time of writing, the stock provides a 4.7% dividend yield.
TC Energy
TC Energy (TSX:TRP) trades for close to $54 per share at the time of writing. The stock was as high as $74 in June last year.
The steady slide over the past 12 months has been frustrating for existing investors, but those with new money to put to work have an opportunity to buy a top TSX dividend stock at an attractive price.
TC Energy has increased the dividend annually for the past two decades and intends to boost the payout by at least 3% per year over the medium term. Revenue and cash flow growth should come from the $34 billion capital program.
TC Energy has fallen out of favour due to soaring costs on its Coastal GasLink project. The pipeline will move natural gas from producers in northeastern British Columbia to a new liquified natural gas (LNG) facility on the B.C. coast. Costs are now expected to be at least $14.5 billion, more than double the original budget.
Ongoing issues persist on the project, including a recent pause due to erosion problems caused by spring flooding. However, Coastal GasLink is now about 87% complete, so the end should be in sight.
Investors who buy the stock at the current level can get a 6.8% yield.
The bottom line on top stocks for passive income
TD and TC Energy have great track records of dividend growth and now offer attractive yields. If you have some cash to put to work in a self-directed TFSA focused on passive income, these stocks deserve to be on your contrarian radar.
