The Impact of Recent Interest Rate Cuts on Dividend Stocks
In the wake of recent interest rate cuts by the Bank of Canada and the U.S. Federal Reserve, investors are witnessing a renewed interest in dividend stocks. These stocks, which had taken a significant hit during the rate hikes of 2022 and 2023, are now back on the radar for those looking to build a portfolio focused on passive income. For Tax-Free Savings Account (TFSA) investors who may have missed the initial bounce, the question arises: which TSX stocks still present attractive opportunities? Here, we explore two notable candidates: Telus and TD Bank.
Telus: A Telecommunications Giant
Telus Corporation (TSX:T) is currently trading around $22, a notable recovery from its 12-month low of approximately $20, yet still significantly below its peak of $34 reached in 2022. The company has been navigating a challenging landscape, primarily due to rising borrowing costs associated with its substantial capital projects, including the expansion of its fiber optic and 5G networks. The rapid increase in interest rates has strained Telus’s profitability, impacting cash flow available for dividends.
Moreover, Telus has faced revenue declines in its Telus Digital subsidiary, compounded by fierce price competition in the communications sector. Despite these challenges, the company remains optimistic about its future. Telus anticipates growth in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2024, suggesting that the stock may be undervalued at its current price.
To mitigate costs, Telus has implemented significant staff reductions over the past year, which should help improve its financial standing. Additionally, the recent decline in interest rates is expected to bolster earnings in 2025. For investors considering Telus, the stock offers a compelling dividend yield of 7%, making it an attractive option for those seeking passive income.
TD Bank: Navigating Regulatory Challenges
Toronto-Dominion Bank (TD) (TSX:TD) has faced its share of hurdles, particularly concerning regulatory scrutiny in the United States. The bank has been criticized for lacking adequate systems to detect and prevent money laundering, a situation that has raised concerns among investors. Despite these challenges, TD remains a strong player in the Canadian banking sector, with a robust retail banking presence in the U.S. built through strategic acquisitions over the past two decades.
Currently, TD’s share price hovers around $86, down from $108 in early 2022. While some of its Canadian peers are trading near multi-year highs, TD’s stock has been under pressure due to fears of potential penalties and restrictions on future acquisitions in the U.S. market, where the bank sees significant growth potential.
To address these concerns, TD has proactively set aside over $3 billion to cover anticipated fines related to the ongoing investigations. Management has indicated that this amount should suffice once the regulatory process concludes, hinting at a possible resolution on the horizon. While the uncertainty surrounding U.S. operations remains, TD continues to demonstrate profitability, and bargain-hunters have started to show interest in the stock, particularly since it was trading around $74 in June.
Investors looking at TD can expect a dividend yield of 4.7%, providing a steady income stream while waiting for the stock to recover as regulatory issues are resolved.
The Allure of Passive Income
Both Telus and TD Bank present intriguing opportunities for investors focused on generating passive income through dividends. With their current valuations reflecting potential overselling, these stocks deserve consideration for those looking to enhance their TFSA portfolios. As interest rates stabilize and economic conditions evolve, both companies are well-positioned to navigate their respective challenges and continue delivering value to shareholders.
For investors seeking to capitalize on the current market dynamics, keeping an eye on these two TSX stocks could yield fruitful results in the long run.