TFSA Passive Income: Should Enbridge or BCE Stock Be on Your Buy List?

Enbridge and BCE currently offer 7% dividend yields. Is one stock oversold?

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Enbridge (TSX:ENB) and BCE (TSX:BCE) trade significantly below their 2022 highs. Investors who missed the rally in these top TSX dividend stocks after the 2020 market crash are wondering if one is now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on generating passive income.

Enbridge

Enbridge (TSX:ENB) just announced plans to acquire three natural gas utilities in the United States for US$14 billion, including the assumption of debt. The deals are expected to close in 2024 and will make Enbridge the largest natural gas utility operator in North America.

The company is best known for its oil pipelines that move 30% of the oil produced in Canada and the United States. However, Enbridge also has large natural gas utilities in Canada, and its natural gas transmission network moves 20% of the natural gas used in the United States, so the deal makes sense. Buying the American utilities puts Enbridge in a good position to capitalize on future use of hydrogen as a fuel that would run through the same infrastructure.

Management is shifting the company’s strategy to focus more on natural gas utilities, the export of oil and liquified natural gas, and renewable energy.

ENB stock dropped as much as 6% on the news, primarily due to the sale of $4.6 billion in new shares that will help fund the acquisitions. At the time of writing, Enbridge trades near $46 per share. It was above $48 before the announcement of the deals and was as high as $59 in June 2022.

The stock looks undervalued today and currently offers investors a 7.7% dividend yield. Enbridge increased the dividend annually for the past 28 years. Steady cash flow from the new utilities should support ongoing dividend growth.

BCE

BCE (TSX:BCE) trades near $55.50 at the time of writing compared to $65 in May. The steep decline is largely due to investor concerns that the Bank of Canada will continue to increase interest rates and hold them elevated for longer than previously expected. BCE uses debt as part of its funding strategy to finance capital projects. The company spent roughly $5 billion in 2022 on development initiatives, including the ongoing rollout of the fibre-to-the-premises program and the expansion of the 5G network.

Higher borrowing expenses will put a dent in profits in 2023. In addition, BCE is reducing staff this year to adjust to challenges in the media business.

Headwinds will persist, but the stock appears oversold. BCE still expects total revenue and free cash flow to grow in 2023, supported by the mobile and internet subscription businesses. The board increased the dividend by at least 5% in each of the past 15 years. At the time of writing, BCE stock provides a 7% dividend yield.

Is one a better pick?

As soon as the Bank of Canada signals the end of rate hikes, there will likely be a rebound in the share prices of top dividend stocks, including Enbridge and BCE.

If you only buy one, Enbridge offers the highest yield and might be more oversold right now. At their current prices, I would probably split a new investment between the two stocks for a TFSA targeting passive income.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Enbridge. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of BCE and Enbridge.

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