The decline in the share prices of some of Canada’s top dividend stocks is giving investors who missed the rally off the 2020 market crash another chance to buy great TSX dividend-growth stocks at attractive prices for a self-directed Tax-Free Savings Account (TFSA) focused on passive income.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) traded as high as $93 in early 2022. At the time of writing, the stock is below $56. This is the lowest it has been since the fall of 2020.
The steep decline has driven up the dividend yield to 7.6%, which is very high for a large Canadian bank stock.
Investors are increasingly concerned that the Bank of Canada’s aggressive rate hikes designed to get inflation under control will cause too much collateral damage to the economy. Households facing fixed-rate mortgage renewals are getting a shock as their monthly payments jump. Businesses with variable-rate loans are also being squeezed, just as the economy appears to be slowing down. Announcements of job cuts are increasingly common. If unemployment surges while rates are still at elevated levels, there could be a wave of mortgage defaults and bankruptcies. The worst-case scenario would be persistent inflation while the economy suffers. The September inflation report came in at 3.8%, so there is still work to be done.
Economists broadly expect a short and mild recession to occur in 2024 or 2025 as inflation slides back to the Bank of Canada’s 2% target. This “soft landing” scenario would see the central bank start to reduce rates as soon as it thinks the inflation battle is won to avoid causing a deeper economic slump. If that turns out to be the way the situation unfolds, Bank of Nova Scotia’s stock is probably oversold today.
The board increased the dividend earlier this year, and Bank of Nova Scotia has a solid capital cushion to ride out some market turbulence. As such, the dividend should be safe and now offers a great yield.
TC Energy
TC Energy (TSX:TRP) trades for $47 per share at the time of writing. That’s down from $74 at one point in 2022. Soaring interest rates are largely to blame in this case as well.
TC Energy builds pipelines and other energy infrastructure assets. The projects can cost billions of dollars and sometimes take years to complete before they go into service and start generating revenue. TC Energy uses debt to finance part of the capital program. As borrowing costs rise, there can be an impact on profits and cash flow that is used for paying dividends.
TC Energy had to monetize some assets this year to shore up the balance sheet after expenses got a bit out of control on its Coastal GasLink pipeline project, which is now expected to cost at least $14.5 billion compared to the original budget of around $6 billion. Fortunately, the latest update said Coastal GasLink is nearly finished.
Despite the near-term headwinds, TC Energy still expects to give investors a 3-5% annual dividend increase over the next few years, supported by the $34 billion capital program.
Investors who buy the stock at the current level can get a yield of 7.9%.
The bottom line on top high-yield stocks for passive income
Bank of Nova Scotia and TC Energy are good examples of high-yield stocks with 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.
