The share prices of BCE (TSX:BCE) and Enbridge (TSX:ENB) are down considerably in the past year. Investors who missed the rebound off the 2020 market crash are wondering if BCE stock or ENB stock is now undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Why top dividend stocks are falling
The pullback in the share prices of many top TSX dividend stocks is largely due to rising interest rates. In recent years, income investors who couldn’t get decent returns from fixed-income products piled into stocks like BCE and Enbridge for their generous dividends.
Today, investors can get a risk-free rate of more than 5% on a five-year Guaranteed Investment Certificate (GIC). This has likely led to a shift of funds out of top dividend stocks and into the safer investments. Stocks carry risk, so the market normally adjusts to maintain a risk premium on the yield.
Once interest rates peak and the Bank of Canada indicates it has finished raising rates or intends to reduce them, the share prices of quality dividend stocks should recover. Inflation is back down to 3.3% as of the July report. With the economy beginning to slow down, and job cuts increasingly hitting the headlines, rates are probably not going to go much higher.
BCE
BCE is Canada’s largest communications firm, with a current market capitalization of $50 billion. The stock is trading near its 12-month low of around $55 per share. BCE was above $74 at the peak in 2022, so there is decent upside potential on the next rebound.
BCE uses debt as part of its funding strategy to finance its capital projects. As borrowing costs increase, there can be an impact on profits. BCE is trimming staff by about 1,300 this year to reduce expenses and adjust to lower revenue in the media group, as advertisers cut marketing budgets or allocate funds to social media.
Despite the near-term challenges, BCE expects overall revenue and free cash flow to increase in 2023 compared to last year. The core mobile and internet subscription businesses remain strong and should continue to perform well through an economic downturn.
BCE increased the dividend by at least 5% annually for the past 15 years. Investors who buy the stock at the current level can get a 7% dividend yield.
Enbridge
Enbridge is another industry leader with a current market capitalization near $95 billion. The stock trades for close to $47 per share at the time of writing compared to more than $59 in June last year.
The pullback looks overdone, given Enbridge’s reliable revenue stream from assets that provide essential services and keep homes, businesses, and the broader economy running smoothly. Enbridge moves nearly a third of the oil produced in Canada and the United States, delivering crude oil to storage facilities, refineries, or export terminals. The company also transports the refined products to end customers or distribution sites.
Enbridge’s natural gas transmission network carries 20% of the natural gas used in the United States. At home, Enbridge has natural gas utilities that distribute the fuel to millions of Canadian homes and commercial customers. In addition, Enbridge has a renewable energy group that has assets in North America and Europe.
Oil and natural gas demand is expected to remain strong for decades, even as countries transition to renewable energy. Canada and the United States are viewed as safe and reliable sources of the energy products.
Enbridge raised the dividend in each of the past 28 years, with increases in the 3% range likely over the medium term. The stock currently provides a 7.5% dividend yield.
Is one a better pick?
BCE and Enbridge pay attractive dividends that should continue to grow. Enbridge offers a higher yield today, but BCE could deliver slightly better dividend growth in the next few years. At the current price points, I would probably split a new investment between the two stocks.
