Investors who missed the rally off the 2020 crash have another opportunity to buy top Canadian dividend stocks at undervalued prices for their self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolios.
Buying dips takes courage, but the strategy enables investors to get higher dividend yields on their investments and can deliver big gains when the share prices rebound.
TC Energy (TSX:TRP) is a major player in the North American natural gas infrastructure sector with 93,000 km of natural gas pipelines and roughly 650 billion cubic feet of natural gas storage located in Canada, the United States, and Mexico.
The company ran into cost troubles with its Coastal GasLink pipeline project over the past few years. Management now expects the total bill to be at least $14.5 billion compared to the original budget of around $6 billion. Fortunately, the pipeline is more than 90% complete.
TC Energy expects the overall $34 billion capital program to generate adequate revenue and cash flow expansion to support annual dividend increases of 3-5% over the medium term. Recent asset sales have shored up the balance sheet, and TC Energy intends to spin off its oil pipelines business to unlock more capital to pursue the growth initiatives.
TRP stock is down considerably over the past year. At the time of writing, the share price is below $50 compared to more than $70 at the peak in 2022.
Investors who buy the stock at the current level can get a 7.5% dividend yield. TC Energy has increased the dividend annually for more than two decades.
BCE (TSX:BCE) trades near $56 per share at the time of writing. The stock was also above $70 at one point last year. The drop has occurred in step with rising interest rates as the Bank of Canada fights to get inflation back down to its 2% target.
Higher interest rates drive up borrowing costs for businesses like BCE that are capital intensive. BCE spent about $5 billion last year on projects, including its fibre-to-the-premises program and the expansion of the 5G mobile network. BCE uses debt as part of its funding strategy, so the increase in borrowing expenses will put a dent in profits.
The latest dip in the share price came as a result of an analyst report that questioned whether BCE’s dividend is sustainable. A distribution cut is not impossible but rather unlikely given the track record of dividend growth, the stability of cash flow, and the importance of the dividend for BCE’s shareholders.
The board increased the payout by at least 5% annually for the past 15 years. BCE is targeting revenue growth and free cash flow growth for 2023 compared to 2022, supported by strength in the mobile and internet subscription businesses.
BCE has a solid balance sheet, and its core revenue stream should hold up well during an economic downturn. The media group faces some challenges as customers trim advertising budgets, but BCE is responding by closing unprofitable radio stations and reducing staff to lower expenses.
At the current share price, investors can get a 6.9% dividend yield.
The bottom line on top stocks for dividends
TC Energy and BCE pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA or RRSP, these stocks look cheap today and deserve to be on your radar.
Before you consider BCE, you’ll want to hear this.
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* Returns as of 8/16/23
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The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of BCE.