Retirees and other investors who use dividend stocks to generate passive income have an opportunity right now to get great yields from some of the best TSX dividend payers. Buying stocks when they are out of favour requires courage and conviction, but the strategy can boost returns and potentially generate solid capital gains.
Telus
Telus (TSX:T) trades near $24.00 at the time of writing compared to more than $34 at the high point in 2022.
The drop is primarily due to the impact of rising interest rates. High inflation triggered by the pandemic supply chain issue and generous government aid forced the Bank of Canada and the U.S. Federal Reserve to aggressively increase interest rates to cool off the hot economy and to try to bring the post-pandemic employment market back into balance. People spend less when they have to allocate more cash flow to cover higher debt expenses. Businesses that carry debt will see the higher interest charges reduce profits.
Telus uses debt to fund part of its capital program, so the higher cost of borrowing will have an impact on net earnings. The drop in the share price is also partly due to challenges at the company’s international subsidiary.
Despite the headwinds, Telus is still expected to report solid revenue growth and growth in earnings before interest, taxes, depreciation, and amortization (EBITDA) for 2023. The worst of the troubles for the international business should be over, and economists expect the Bank of Canada to start cutting interest rates this year.
At the current price, Telus stock is probably oversold. Investors who buy at today’s level can get a 6.2% dividend yield. Telus has increased the dividend annually for more than 20 years.
TC Energy
TC Energy (TSX:TRP) trades near $52 per share at the time of writing. That’s up from $45 in early October but still down considerably from the $74 it reached in 2022.
TC Energy finally reached mechanical completion on its Coastal GasLink project near the end of 2023. The final cost is expected to be around $14.5 billion. This is more than double the original budget. Management spent a good chunk of 2023 selling stakes in non-core assets to raise $5.3 billion to help shore up the balance sheet. TC Energy intends to spin off the oil pipelines business this year to unlock value for investors and plans to raise another $3 billion through asset transactions.
Looking ahead, TC Energy says the ongoing capital program should be able to support planned annual dividend growth of at least 3%. Investors who buy the stock at the current level can get a 7.1% dividend yield. TC Energy has increased the dividend annually for more than two decades.
Fortis
Fortis (TSX:FTS) has increased its dividend annually for the past 50 years. The company gets nearly all of its revenue from rate-regulated assets, so cash flow tends to be predictable and reliable. Fortis grows through a combination of acquisitions and internal development projects. The current capital program of about $25 billion is expected to deliver compound annual rate base growth of better than 6% over five years. Based on this, the company intends to boost the dividend by at least 4% annually through 2028.
The stock trades for close to $55 at the time of writing compared to $65 at the high point in 2022. Investors can now get a solid 4.3% yield and wait for the steady distribution increases to boost the return on the investment.
The bottom line on top TSX dividend stocks
Telus, TC Energy, and Fortis pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks still look cheap and deserve to be on your radar.
