Written by Andrew Walker at The Motley Fool Canada
The market correction in some sectors of the TSX is giving investors who missed the rally after the 2020 market crash a new opportunity to buy top Canadian dividend stocks at discounted prices for self-directed Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP) portfolios.
Interest rate impact on dividend stocks
Soaring interest rates are largely to blame for the pullback in the share prices of many leading dividend-growth stocks. As interest rates increase, they trigger a jump in bond yields and a rise in the rates people can get on no-risk Guaranteed Investment Certificates (GICs). Investors want to get a yield premium for owning stocks, so share prices of dividend payers often fall when interest rates rise. A lower share price pushes up the dividend yield.
Increased borrowing costs also come into play. Big dividend payers such as communications firms, pipeline companies, and utilities typically grow through capital investments and acquisitions and use debt to fund these initiatives. As borrowing costs increase, there can be a decline in profits and a reduction in cash available for dividend increases.
At some point, the Bank of Canada will get inflation under control and will begin to reduce interest rates to avoid causing a deep recession. When rates start to decline, the share prices of top dividend-growth stocks could surge.
Enbridge (TSX:ENB) raised its dividend in each of the past 28 years. Recent annual increases have been about 3%, and investors will likely see the trend continue in the 3-5% range over the next few years.
Enbridge is diversifying its revenue stream through acquisitions. The company recently announced a US$14 billion deal to buy three natural gas utilities in the United States. These assets generate steady rate-regulated revenue and have opportunities for growth projects. Enbridge purchased an oil export terminal in 2021 for US$3 billion to benefit from anticipated demand growth from overseas buyers. The company has also taken a stake in the Woodfibre liquified natural gas (LNG) export facility being built in British Columbia. In addition, Enbridge bulked up its renewable energy group with the purchase of a developer of solar and wind projects.
Enbridge trades near $44 per share at the time of writing compared to $56 earlier this year.
The pullback is likely overdone, and investors can now get a dividend yield of 8%.
Fortis (TSX:FTS) owns utility businesses in Canada, the United States, and the Caribbean. The assets include power-generation facilities, electric transmission networks, and natural gas distribution utilities. Fortis gets nearly all of its revenue from rate-regulated assets, so cash flow tends to be predictable and reliable.
The company has a $25 billion capital program on the go that will increase the rate base considerably over the next five years. As the new assets go into service, Fortis expects cash flow to rise enough to support planned annual dividend increases of 4-6% through 2028.
Fortis raised the distribution in each of the past 50 years. Investors can now get a 4.3% dividend yield. Fortis currently trades for close to $55 compared to a high of around $65 last year.
The bottom line on top dividend stocks
Enbridge and Fortis pay attractive dividends that should continue to grow. If you have some cash to put to work, these stocks look cheap today and deserve to be on your radar.
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The Motley Fool recommends Enbridge and Fortis. The Motley Fool has a disclosure policy. Fool contributor Andreew Walker owns shares of Enbridge.