The decline in interest rates is driving down rates offered on Guaranteed Investment Certificates (GICs). As a result, investors are starting to return to high-yield dividend stocks to get better returns on their savings. Retirees who missed the bounce off the 12-month lows are wondering which top TSX dividend stocks are still undervalued and good to buy for a portfolio focused on passive income.
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BCE
BCE (TSX:BCE) is a contrarian pick right now. The stock plunged from $74 in 2022 to $43 in July this year. Bargain hunters emerged in recent weeks, but BCE still only trades around $47 at the time of writing.
Much of the damage that occurred in the past two years is due to the surge in interest rates in Canada. BCE uses debt to fund part of its large capital program. Higher borrowing costs cut into profits and reduce cash that can be used for dividend payments. Recent rate cuts by the Bank of Canada will help lower debt expenses in the coming quarters, so investors should start to see the impact next year.
On the operational side, BCE is facing a few headwinds. The media division is struggling with revenue declines in the radio and television segments. BCE closed or sold dozens of radio stations in the past year, trimmed television programming, and cut roughly 6,000 positions across the company to adjust to the current market conditions. At the same time, price wars have put pressure on margins in the mobile and internet businesses.
Near-term challenges are expected to persist, but the worst should be over for investors. BCE’s cost-cutting measures will make a big difference in the coming quarters, and management still expects BCE to deliver overall revenue in 2024 that is similar to last year. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) are forecast to come in slightly better than 2023.
Based on this outlook, the dividend should be safe, and BCE is likely oversold at this point. Investors who buy BCE stock at the current level can get a dividend yield of 8.5%.
TC Energy
TC Energy (TSX:TRP) is up about 17% since July 9 and more gains should be on the way. The stock trades near $60 per share at the time of writing. It was as high as $74 at one point in 2022 before rate hikes in Canada and the United States sent pipeline stocks into an extended decline. TRP actually slipped as low as $45 in early October last year before market sentiment shifted from fears of additional rate hikes to expectations of rate cuts in 2024.
TC Energy spends billions of dollars every year on growth projects. As with BCE, debt is used to fund part of the capital program. In the case of pipelines, the projects often take years to complete, and costs can soar, as TC Energy experienced with its Coastal GasLink project that saw the budget more than double to about $14.5 billion.
Coastal GasLink reached mechanical completion in 2023 and is on track to go into commercial operation in 2025. TC Energy has done a good job of monetizing non-core assets to reduce the extra debt it took to get the project completed. The company continues to invest in growth initiatives that will see capital spending at a rate of $6 billion to $7 billion annually over the medium term. As new assets go into service, the bump to cash flow should support ongoing dividend increases.
TC Energy raised the payout in each of the past 24 years. Investors who buy the stock at the current level can get a dividend yield of 6.4%.
The bottom line on top TSX dividend stocks
BCE and TC Energy pay attractive dividends for investors seeking high-yield picks for a portfolio targeting passive income. If you have some cash to put to work, these stocks look cheap today and deserve to be on your radar.
