Canadian pensioners are searching for ways to get better returns on their savings now that cuts to interest rates by the Bank of Canada are pushing down rates offered on Guaranteed Investment Certificates (GICs). This is driving a transition of funds back into high-yield TSX dividend stocks, and the trend is likely to continue through next year.
Bargains are disappearing, but some top Canadian dividend-growth stocks still look attractive.
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TC Energy
TC Energy (TSX:TRP) trades near $63 per share compared to $74 at the high point in 2022.
The stock dipped as low as $45 at the peak of the rate-hike plunge but has since staged a solid recovery.
TC Energy has a large capital program to drive growth. The company uses debt to fund part of the investments, so higher interest rates drive up borrowing costs. TC Energy’s Coastal GasLink project that reached mechanical completion in late 2023, for example, saw its budget more than double to about $14.5 billion. This forced TC Energy to take on extra debt, putting added pressure on the share price.
Over the past year, however, management has done a good job of monetizing non-core assets to reduce the debt load. Coastal GasLink also completed a successful $7.15 billion debt sale to refinance loans taken to get the 670km pipeline finished. Natural gas is expected to start flowing in 2025. This should provide a nice boost to revenue.
TC Energy’s ongoing capital program is expected to be in the range of $6 billion to $7 billion per year over the medium term. As new assets go into service the added cash flow should support dividend hikes. 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%.
Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) recently regained its position as Canada’s third-largest bank by market capitalization. The stock trades near $68.50 at the time of writing. This is up from the 12-month low of around $55 but is still way off the $93 the stock reached in 2022.
Investors are moving back into banks on the anticipation that cuts to interest rates will lead to lower provisions for credit losses (PCL) in the coming months as borrowers with too much variable-rate debt get some relief on their interest payments. The Bank of Canada is expected to continue reducing interest rates into 2025. As long as the economy holds up reasonably well and unemployment doesn’t go too high, there shouldn’t be a large spike in mortgage defaults as homeowners renew fixed-rate loans.
Bank of Nova Scotia intends to shift its growth plan away from South America where it spent billions of dollars over the past 20 years. The new chief executive officer is focusing new capital on the United States, Canada, and Mexico. Bank of Nova Scotia recently announced a US$2.8 billion investment to acquire a 14.9% stake in KeyCorp, an American bank.
Investors who avoided Bank of Nova Scotia due to its South American ambitions might start to warm up to the stock as the new strategy progresses. In the meantime, investors who buy BNS stock at the current level can get a dividend yield of 6.2%.
The bottom line on high-yield stocks
TC Energy and Bank of Nova Scotia are good examples of high-yield stocks that should continue to raise their dividends. If you have some cash to put to work in a portfolio focused on passive income, these stocks deserve to be on your radar.
