Are you tired of guessing where stock prices will go next? Focus on dividend income generation instead. Eligible Canadian dividends are taxed at lower rates for Canadian investors if the shares are held in your taxable or non-registered account versus interest income. So, Canadian dividend stocks are a great source of passive income. Here are a couple of TSX dividend stocks that have seriously huge payouts, which appear to be sustainable.
Buy Bank of Nova Scotia stock for a huge payout
Under a period of elevated inflation, higher interest rates, scarcity of capital and lower economic growth, the big Canadian bank stocks are being pressured. In particular, Bank of Nova Scotia (TSX:BNS) stock is one of the weaker-performing banks. It is down close to 7% in the last 12 months.
Other than its core operations in Canada, Bank of Nova Scotia also has greater exposure to international markets versus the other big banks. Its international markets, with a focus on Latin America geographies like Mexico, Peru, and Chile, may be susceptible to greater risk in today’s environment. Therefore, at $62.24 per share at writing, BNS stock offers a massive dividend yield of 6.8%, which is the highest yield offered by the big Canadian bank stocks.
Because of a negative macro outlook, like its peers, Bank of Nova Scotia has higher loan loss provisions in the near term. Its year-to-date provisions for credit losses are 2.5 times year over year at $2.2 billion. Ultimately, its adjusted earnings per share fell 18% to $5.28 year to date. That said, an adjusted return on equity of 12.7% is not bad.
Importantly, the bank’s earnings are still covering its dividend. Assuming a conservative earnings growth rate of 4%, the stock can still deliver long-term total returns of about 11% per year with little valuation expansion. This would be a very solid return in a blue chip stock that enjoys a strong S&P credit rating of A+.
Enbridge stock for a 7.8% dividend yield
You can consider Enbridge (TSX:ENB) stock for an even bigger dividend yield of 7.8%. Higher interest rates have increased the cost of capital for businesses, including for the large energy infrastructure company because of its high debt levels, which is the nature of its business. Its recent debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) is about 4.8 times but within its target range.
On the bright side, Enbridge generates reliable cash flows that support its big dividend and has a track record of growing dividends. First, less than 2% of the EBITDA from its assets are subject to commodity risk. Second, it generates cash flow from a diversified customer base and over 95% of its customers are investment grade. Third, approximately 80% of its EBITDA has inflation protection.
Enbridge has increased its dividend for about 28 consecutive years. Since it expects to grow its distributable cash flow per share by about 3% through 2025 and about 5% post 2025, investors can expect its dividend to grow by about 3% per year in the near term. Therefore, the stock can deliver long-term total returns of about 11% per year with little valuation expansion.
At $45.16 per share at writing, analysts actually believe the stock is undervalued by about 20%. In the worst-case scenario, investors might have to wait until an interest rate-cutting cycle before the stock could take flight.
