The market correction is giving Canadian savers a chance to buy top TSX dividend stocks at discounted prices for their self-directed Registered Retirement Savings Plan (RRSP) portfolios. Buying stocks on dips takes courage, but it is an opportunity to get higher dividend yields and sets the portfolio up for decent potential total returns on a rebound in share prices.
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Enbridge
Enbridge (TSX:ENB) is a giant in the North American energy infrastructure industry with a current market capitalization near $96 billion. The stock price is down considerably over the past year amid a broad pullback triggered by the sharp rise in interest rates in Canada and the United States.
Energy infrastructure businesses have large capital programs, and they use debt as part of their funding strategy to finance their growth projects. With borrowing costs soaring, investors have reduced profit expectations. In addition, Enbridge and other top dividend stocks attracted a lot of capital in the past several years, as investors sought out good yields on their savings. Now that fixed-income products offer decent rates and no risk, stocks like Enbridge have come under pressure.
At the time of writing, Enbridge trades near $47 per share compared to more than $59 in June last year when oil prices soared above $120 per barrel.
The drop appears overdone, considering Enbridge continues to deliver solid results. The company confirmed good financial guidance for the year when it reported second-quarter (Q2) 2023 earnings. Throughput on the Mainline system is at record levels, and Enbridge is working on a $17 billion capital program to drive growth.
The board increased the dividend in each of the past 28 years. At the time of writing, investors can get a 7.5% dividend yield from ENB stock.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is trading at a new 12-month low at the time of writing. The stock is below $62.50 compared to more than $90 in the early part of last year.
The pullback has largely tracked the steep rise in interest rates and the market’s expectations for additional rate hikes. Canadian inflation jumped back up to 3.3% in July after dipping to 2.8% in June. Markets are now worried that interest rates will go even higher and stay elevated for longer, as the central bank battles to get inflation back to its target rate of 2%.
Bank of Nova Scotia increased its provision for credit losses (PCL) by nearly $500 million in fiscal Q2 2023 compared to the same period last year, so the bank is already starting to see some stress in the loan book. Investors should prepare for the trend to continue in the coming quarters.
If the Bank of Canada is forced to drive the economy into a deep recession to get inflation under control, the banks could see a wave of defaults as over-leveraged businesses and households exhaust savings and are forced into bankruptcy. A flood of mortgage defaults would hit Bank of Nova Scotia and its peers, as they all have significant residential mortgage portfolios.
That being said, the current expectation among economists is for a mild and short recession. Even if the economy goes through a more serious contraction, Bank of Nova Scotia has a solid capital cushion to ride out the turbulence.
The board increased the dividend when Bank of Nova Scotia reported the fiscal Q2 2023 results, so the management team appears to be comfortable with the earnings outlook. Investors who buy the dip can get a 6.8% dividend yield today.
The bottom line on top TSX dividend stocks
Additional downside is possible, but Enbridge and Bank of Nova Scotia already look undervalued and pay attractive dividends that should 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.
