The market correction in top dividend stocks is difficult to watch, but it also gives investors a chance to buy great companies at cheap prices for a self-directed Tax-Free Savings Account (TFSA) portfolio focused on generating steady high-yield passive income.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) recently announced plans to trim its workforce by 3% to adjust to changing customer habits and make the business more efficient. Most banks are reducing staff this year after a hiring binge that occurred after the pandemic.
It makes sense that the banks are being cautious. Rising interest rates are starting to slow down the economy, and the housing market is expected to go through a rough period as potential buyers get squeezed out and existing owners struggle to cover higher mortgage rates. At the same time, businesses are expected to borrow less money as increased debt costs eat into earnings and make some capital projects no longer attractive.
Bank of Nova Scotia set aside more than $800 million in fiscal third quarter (Q3) of 2023 for potential loan losses. This was almost double the amount from the same period in 2022, so the bank is already seeing the impact of the Bank of Canada’s rate hikes.
This could be why the share price is down from $74 in February to the current price near $56.50.
Despite the economic headwinds, Bank of Nova Scotia remains very profitable and has a solid capital cushion to ride out the market turbulence. Economists widely expect the economy to go through a mild recession instead of a deep downturn in the next year or two. Assuming their predictions are correct, Bank of Nova Scotia is probably oversold right now.
The board increased the dividend earlier this year. Investors who buy BNS stock at the current level can get a 7.5% dividend yield.
TC Energy
TC Energy (TSX:TRP) has increased its dividend annually for more than two decades. The company has a $34 billion capital program on the go that is expected to drive revenue and cash flow growth in the coming years to support planned annual dividend increases of 3% to 5%.
High interest rates are pushing up debt expenses, and soaring costs on a major project have soured investors on the stock. TC Energy’s Coastal GasLink project is expected to cost at least $14.5 billion, which is more than double the initial budget. The pipeline is almost finished and should start generating revenue next year.
TRP stock trades for close to $46.50 per share at the time of writing. That’s down from $74 at the high point last year. The drop looks exaggerated at this point, and investors who buy at the current level can get a dividend yield of 8%.
The bottom line on top stocks for passive income
Near-term volatility is expected, but Bank of Nova Scotia and TC Energy pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA targeting passive income, these stocks look cheap today and deserve to be on your radar.
