The recent pullback in the TSX has investors wondering which dividend stocks might now be undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) focused on income and total returns.
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Fortis
Fortis (TSX:FTS) trades for $59.75 at the time of writing compared to the 2024 high of around $63.75 it reached last month. The stock is still up about 13% in the past six months but remains below the $65 it hit at the peak in 2022.
Changes in interest rates in Canada and the United States have largely driven the movements in the share price over the past two years. Utility companies, like Fortis, spend billions of dollars on capital projects to drive growth and fund part of this with debt. As interest rates soared in 2022 and 2023, the higher debt costs caused concerns among investors that elevated interest expenses would reduce cash available for dividends and debt reduction.
The rebound in the stock occurred as the Bank of Canada and the U.S. Federal Reserve started to cut rates in the past six months. More reductions are expected in 2025, although they might not be as large or occur as quickly as previously expected.
Fortis has a $26 billion capital plan that will significantly increase the rate base over the next five years. As new assets go into service, the increase in cash flow should support planned annual dividend increases of 4% to 6%. Fortis raised the distribution in each of the past 51 years.
TD Bank
TD (TSX:TD) is a contrarian pick today among the large Canadian banks. The stock is down 11% in 2024 compared to gains for its peers.
Regulators in the United States hit TD with fines of more than $3 billion in 2024 for not having adequate systems in place to prevent money laundering. The U.S. also placed an asset cap on TD’s American operations as part of the penalties. This effectively puts TD’s growth program in the United States on hold.
TD will get a new chief executive officer in 2025. It will take some time for the bank to develop a new growth strategy, but TD should eventually get back on track. The overall business remains very profitable, and investors can currently collect a dividend yield of 5.5% while waiting for a turnaround.
Canadian National Railway
Canadian National Railway (TSX:CNR) is down 13% in 2024. Labour disputes, port shutdowns, and wildfires have all impacted the business this year. Recent weakness in the stock could be due to uncertainties around how Donald Trump’s proposed tariffs might impact trade.
CN operates nearly 20,000 route miles of rail lines that connect ports on the Pacific and Atlantic coasts of Canada with the Gulf of Mexico in the United States. The business is strategically important for the Canadian and U.S. economies, moving raw materials and finished goods between producers, manufacturers and their customers.
Near-term volatility is expected, but CN should deliver solid results over the long haul.
The bottom line on top TSX stocks
Buying Fortis, TD, and CN on meaningful pullbacks has historically proven to be a savvy move for patient investors. If you have some cash to put to work, these stocks deserve to be on your radar.
