The market pullback is giving Canadian income investors a chance to buy top dividend stocks at undervalued prices for a self-directed Tax-Free Savings Account (TFSA) focused on dividend income.
Buying stocks on dips takes some courage, as you need to be able to ride out potential additional downside. In the current environment, this is definitely possible. The upside is the jump in the dividend yield and a shot at decent capital gains on a market rebound.
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Bank of Nova Scotia
Bank of Nova Scotia (TSX:BNS) is a contrarian pick right now in the Canadian bank sector. The stock has underperformed its large peers in recent years and is down about 19% so far in 2025 after a decent rally in late 2024.
Investors haven’t seen the anticipated returns from Bank of Nova Scotia’s big bets in Latin America where the bank spent billions of dollars on acquisitions over the past three decades to build a large presence from Mexico right down to Chile. Economic and political volatility in Latin America have offset the potential benefits of tapping low banking services penetration and a growing middle class in these markets.
Bank of Nova Scotia’s new chief executive officer is shifting the growth investments to the United States and Canada. The bank spent US$2.8 billion to acquire a 14.9% stake in KeyCorp, an American regional bank, last year. The bank also recently sold its operations in Colombia, Costa Rica, and Panama. Additional monetization in Latin America could occur with funds allocated to new opportunities in other markets. In Canada, Bank of Nova Scotia has created a new executive position to oversee an expansion in Quebec.
Shareholders will need to be patient for the turnaround efforts to deliver results, but the stock is starting to look cheap. Investors who buy BNS at the current level can get a dividend yield of 6.75%.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is down 35% in the past year. Most of the pullback is due to a slide in oil prices. West Texas Intermediate (WTI) currently sells at US$57 per barrel. It was around US$85 12 months ago.
Investors might also be upset that CNRL spent US$6.5 billion in a cash deal to buy Chevron’s Canadian assets last fall. CNRL took on some extra debt to fund the purchase. The subsequent slide in oil prices in recent months might have the market wondering if the deal was overpriced and if the money would be better spent on share buybacks.
Near-term headwinds will likely persist for the oil market. A global recession caused by trade wars would be negative for oil demand, especially in China, where the economy was already under pressure before the recent tariff battle with the United States. At the same time, OPEC has indicated it plans to go ahead with a supply increase, even with oil trading at such low levels.
CNRL is known for its oil assets, but the company is also a major natural gas producer. Natural gas demand is expected to increase in the coming years as new gas-fired power facilities are built to provide electricity for artificial intelligence data centres.
Canadian oil producers can sell to more international buyers now that the Trans Mountain expansion is completed and in operation. The new Coastal GasLink pipeline that connects natural gas producers to the new LNG Canada export facility will help natural gas producers.
Renewed interest in east-west pipelines in Canada could lead to additional access to international markets if projects get the green light and are actually built.
CNRL raised its dividend in each of the past 25 years, so the dividend should be safe. Investors who buy at the current share price can get a dividend yield of 6.5%.
The bottom line on top stocks for passive income
Near-term volatility is expected, but Bank of Nova Scotia and Canadian Natural Resources pay attractive dividends that should be safe. If you have some cash to put to work in a TFSA focused on passive income, these stocks deserve to be on your radar.
