The market correction is giving self-directed Registered Retirement Savings Plan (RRSP) investors a good opportunity to buy top Canadian dividend stocks at undervalued prices.
TC Energy
TC Energy (TSX:TRP) operates more than 90,000 km of natural gas pipelines and 650 billion cubic feet of natural gas storage capacity in Canada, the United States, and Mexico. The $100 billion asset base includes oil pipelines and power-generation facilities.
TRP stock is down considerably over the past year. The share price is close to $48 at the time of writing compared to more than $70 in July 2022. The drop is due to a combination of factors, both in the sector and specific to the firm itself.
Energy infrastructure stocks are broadly down across the board as a result of the sharp increase in interest rates over the past 12 months. Building pipelines is a capital-intensive business, and firms use debt as part of their funding strategy to get assets completed before they generate revenue. Higher borrowing costs make projects more expensive.
Large projects can take years to complete, and sometimes costs soar due to delays, inflation, contractor issues, and protests. That’s exactly what TC Energy has had to contend with on its Coastal GasLink pipeline that will eventually carry natural gas from producers in northeastern British Columbia to a new liquified natural gas (LNG) facility being built on the B.C. coast.
In the first quarter (Q1) 2023 earnings report, the company said the project was 87% complete. The estimated final cost will be at least $14.5 billion, which is more than double the original budget.
On the positive side, TC Energy says its overall capital program of $34 billion will still drive enough cash flow growth to support planned dividend increases of 3-5% per year. TC Energy recently announced a deal to sell a 40% interest in another asset for $5.2 billion to help fund the growth agenda.
The project setbacks are frustrating, but the drop in the share price appears overdone. Investors who buy TRP stock at the current level can get a 7.7% dividend yield. The company has increased the distribution annually for more than two decades.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) raised its quarterly dividend from $1.03 to $1.06 when the bank reported fiscal Q2 2023 results. The move underlines the solid earnings the bank continues to deliver, despite headwinds facing the broader banking industry.
Investors soured on bank stocks over the past year due to fears that soaring interest rates will cause a recession, drive up unemployment, and trigger a wave of commercial and personal bankruptcies. The Bank of Canada is raising rates to intentionally cool off the economy and loosen up the tight jobs market in its effort to get inflation back down to 2%. Inflation came in at 2.8% for June, so there might be some light at the end of the tunnel.
Economists say rate hikes typically take 12-18 months to work through the economy before the full impact is felt. If the Bank of Canada raises rates too high and keeps them elevated for too long, there is a risk that it will cause a deep economic downturn, instead of a soft landing.
Bank of Nova Scotia raised its provision for credit losses (PCL) compared to the same period last year when it reported fiscal Q2 2023 results. This is consistent with most of the big Canadian banks and indicates that financial institutions are seeing some problems emerge on the fringes of their loan books. The overall health of the loan portfolio, however, looks good, and Bank of Nova Scotia has excess capital on hand in case things get ugly.
The drop in the share price from more than $90 in early 2022 to the current price near $65.50 is probably exaggerated. Investors who buy at the current level can get a 6.5% dividend yield from BNS stock.
The bottom line on top RRSP stocks
TC Energy and Bank of Nova Scotia are good examples of high-yield stocks with dividends that continue to grow. If you have some cash to put to work in a self-directed RRSP, these stocks deserve to be on your radar.
