Cuts to interest rates by the Bank of Canada are stoking new interest in dividend stocks on the TSX. Investors who missed the bounce are wondering which dividend payers might still be undervalued and good to buy for a self-directed portfolio focused on passive income and total returns.
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Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) trades near $73.50 at the time of writing. That’s up from the 12-month low of around $55 but is still way off the $93 the stock fetched in early 2022 before central banks began to aggressively raise interest rates to get inflation under control.
Rising interest rates are usually positive for banks due to the boost to net interest margins. However, the steep rise in rates that occurred over such a short period of time put over-leveraged businesses and households in a tight spot. This has led to rising provisions for credit losses (PCL) at Bank of Nova Scotia and its peers. The Bank of Canada has reduced interest rates by 0.75% so far in 2024, and more cuts are expected now that inflation is back at the 2% target. Borrowers with variable-rate loans get immediate relief, and those with fixed-rate mortgages will be able to renew at rates that are better than what was available in the past year. Provisions could remain elevated in the near term as rates are still relatively high, but PCL should stabilize in the coming months and begin to decline next year as long as the economy makes a soft landing.
Bank of Nova Scotia has a solid capital cushion to ride out ongoing volatility that might occur if the economy rolls over and continues to invest in growth initiatives. The bank recently announced a US$2.8 billion deal to acquire a 14.9% position in KeyCorp, a U.S. regional bank, as part of the new strategy to boost Bank of Nova Scotia’s presence in the United States.
Investors who buy BNS stock at the current level can get a dividend yield of 5.75%.
Fortis
Fortis (TSX:FTS) increased its dividend in each of the past 50 years and expects to boost the payout by 4-6% annually through at least 2028. This is the kind of payout reliability investors like to see when searching for buy-and-hold dividend stocks.
Fortis is working on a $25 billion capital program that is expected to raise the rate base from $37 billion in 2023 to $49.4 billion over five years. The resulting increase to cash flow should support the planned dividend growth. Fortis uses debt to fund part of its capital program. The drop in borrowing costs from rate cuts will help profits and can free up more cash for distributions.
TC Energy
TC Energy (TSX:TRP) trades near $64.50 at the time of writing. Investors who bought the stock around this time last year are already sitting on nice gains, but more upside could be on the way. TC Energy was as high as $74 at the peak in 2022.
The company’s $14.5 billion Coastal GasLink pipeline will go into commercial service in 2025. In addition, TC Energy plans to invest $6 billion to $7 billion per year over the medium term on other capital projects. This should boost cash flow to support steady dividend growth. TC Energy raised the payout in each of the past 24 years. Investors can currently get a dividend yield of close to 6% from TRP stock.
The bottom line on top TSX dividend stocks
Bank of Nova Scotia, Fortis, and TC Energy pay attractive dividends that should continue to grow. If you have some cash to put to work in a dividend portfolio, these stocks deserve to be on your radar.
