BCE (TSX:BCE) and Fortis (TSX:FTS) are down considerably from their 2023 highs. Retirees and other investors seeking passive income are wondering if BCE stock or Fortis stock are now oversold and good to buy for a self-directed Tax-Free Savings Account (TFSA) portfolio.
BCE
BCE is facing some challenges in its media business, as clients trim ad spending on radio and television to preserve cash flow or shift to digital. This is an ongoing issue across legacy media platforms and could continue. BCE reduced staff numbers and closed some radio stations this year to adjust to the current market conditions. This is part of the reason the stock price is down to $55.50 from $65 earlier this year.
Ongoing rate hikes by the Bank of Canada are also putting pressure on the stock. BCE uses debt as part of its funding strategy, and the jump in borrowing costs will lead to lower profits in 2023 compared to last year. Income investors might also move funds to fixed-income alternatives, like Guaranteed Investment Certificates (GICs).
Despite the headwinds, the pullback is likely overdone at this point. BCE’s core mobile and internet subscription businesses continue to grow. In fact, BCE says total revenue and free cash flow should be higher in 2023 than last year.
The board increased the dividend by at least 5% in each of the past 15 years. Investors who buy at the current level can get a 7% dividend yield.
Fortis
Fortis has 10 electricity and natural gas utilities in Canada, the United States, and the Caribbean. The portfolio of $64 billion in assets generates 99% of revenue from rate-regulated operations. This means revenue and cash flow tend to be predictable and reliable. Electricity and natural gas are essential services that homes and businesses need, regardless of the state of the economy.
Fortis has a $22.3 billion capital program on the go that is expected to increase the rate base from $34 billion to $46 billion over five years. The company is spending $4.3 billion in 2023 on the projects. As new assets are completed and go into service, the increased cash flow is expected to support planned annual dividend increases of 4-6% through 2027.
Fortis has raised the dividend in each of the past 49 years. At the time of writing, the stock offers a dividend yield of 4.2%. Fortis stock trades below $54 compared to more than $61 in May.
Is one a better pick?
BCE and Fortis pay attractive dividends that should continue to grow. As soon as interest rates begin to decline, these stocks should rebound. Investors simply seeking passive income should probably make BCE the first choice.
Fortis could deliver better total returns over the long run and should be the safer pick. As such, I would probably split a new investment between the two stocks at these prices.
