Consecutive 0.25% interest rate cuts by the Bank of Canada in recent months and the anticipation of further reductions is driving money back into oversold dividend stocks. Investors are wondering which TSX dividend stocks are still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) portfolio targeting passive income.
TC Energy
TC Energy (TSX:TRP) trades near $61.50 at the time of writing compared to $45 in early October last year.
Investors who bought the energy infrastructure stock last fall before sentiment on rates shifted from fear of more hikes to anticipation of 2024 cuts are already sitting on nice gains, but more upside should be on the way. TC Energy was as high as $74 in 2022 before the Bank of Canada and the U.S. Federal Reserve aggressively raised rates to get inflation under control.
TC Energy completed its Coastal GasLink pipeline late last year after delays and soaring costs more than doubled the budget to about $14.5 billion. Commercial operation is expected to start in 2025, so investors should see the 670km natural gas pipeline start generating steady revenue. The asset will deliver natural gas from Canadian producers to a new liquified natural gas (LNG) export facility being built on the coast of British Columbia. Management has done a good job of monetizing non-core assets to reduce additional debt taken on to get the project finished. Coastal GasLink also successfully sold $7.15 billion in bonds to refinance loans.
Looking ahead, TC Energy’s ongoing capital program is expected to track at $6 billion to $7 billion per year over the medium term. As new assets go into service, the jump in cash flow should support steady dividend growth. TC Energy raised the payout in each of the past 24 years. Investors who buy TRP stock at the current level can get a dividend yield of 6.25%.
Fortis
Fortis (TSX:FTS) is up about 12% in the past six months and the drift higher should continue if the U.S. Federal Reserve starts to cut interest rates as expected next month and through the end of the year. Fortis is trading near $59 at the time of writing. That’s off the 12-month low of around $50 but still down from the $65 it reached in 2022.
Fortis is a utility company with about $69 billion in assets located across Canada, the United States, and the Caribbean. The businesses get nearly 100% of their revenue from rate-regulated assets. This means cash flow tends to be predictable and reliable, which is good news for dividend investors who want steady and growing passive income.
Fortis grows by making acquisitions as well as investing in new developments. The current $25 billion capital program is expected to boost the rate base from $37 billion in 2023 to more than $49 billion in 2028. Additional projects under consideration could get added to the pipeline and it wouldn’t be a surprise to see Fortis do another deal in the next few years as borrowing costs decline.
The existing capital plan is expected to generate enough cash flow growth to support planned annual dividend increases in the 4-6% range through 2028. Fortis has increased the dividend annually for the past five decades. Investors who buy FTS stock at the current level can get a dividend yield of 4%.
The bottom line on top stocks for passive income
TC Energy and Fortis pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA focused on passive income, these stocks deserve to be on your radar.
