Written by Andrew Walker at The Motley Fool Canada
Telus (TSX:T) and Enbridge (TSX:ENB) are down considerably from their 12-month highs. Contrarian investors seeking high dividend yields and a shot at decent capital gains are wondering if Telus stock or ENB stock is now oversold and good to buy for a self-directed Tax-Free savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio.
Impact of interest rates on dividend stocks
Soaring interest rates over the past 18 months are to blame for most of the downside in Telus and Enbridge.
Investors often buy telecom and energy infrastructure stocks for reliable passive income. As the Bank of Canada increases interest rates in its efforts to cool off the economy and reduce inflation, the rates investors can get from safe Guaranteed Investment Certificates (GICs) also jump. Stocks carry risks, so investors want a risk premium compared to a risk-free investment. The result is a slide in the share prices of top dividend stocks, including Telus and Enbridge, leading to higher dividend yields.
GICs now provide rates as high as 5.75%, depending on the term and the issuing company. There might be more upside for GIC rates in the near term if the Bank of Canada continues to increase interest rates. However, the top is likely in sight, and economists are starting to predict rate cuts in 2024.
Once rates begin to fall, there could be a reversal of funds back into top dividend stocks like Telus and Enbridge. Investors seeking high yields have an opportunity to get in before that occurs.
Telus trades below $22.50 per share at the time of writing compared to $28 in May and more than $34 at the high point in 2022.
The company gets most of its revenue from the core mobile and internet subscription businesses. These are essential services that households and businesses require regardless of the state of the economy, so the main revenue stream should hold up well, even during challenging economic times.
Telus has subsidiaries that are more susceptible to an economic downturn. Telus International (TSX:TIXT) is facing some headwinds as client spending declines on its global IT and multi-lingual call centre services.
Telus reduced financial guidance for 2023 due to the issues at TIXT and is cutting headcount by 6,000 to adjust to the changing market conditions. That being said, consolidated operating revenue is still expected to increase by at least 9.5%, and adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) should still grow by at least 7% compared to last year.
Investors who buy Telus stock at the current price can get a 6.5% dividend yield. Telus has increased the payout annually for more than two decades.
Enbridge is a giant in the energy infrastructure industry with oil pipelines, oil export facilities, natural gas pipelines, and natural gas utilities. The company also has a growing renewable energy business.
Enbridge recently announced a US$14 billion deal to buy three natural gas utilities in the United States. The acquisitions will make Enbridge the largest natural gas utility operator in North America and bring more diversification to the revenue stream.
The company expects adjusted EBITDA to grow at a steady pace, supported by the new assets, the current capital program, and new capital investment opportunities. This should drive ongoing dividend increases. Enbridge raised the payout in each of the past 28 years. Investors can now get a 7.8% yield from ENB stock.
Is one a better pick?
Enbridge offers the higher yield right now, so it would be the first pick for investors focused mostly on passive income. Telus also offers a great yield and might deliver better dividend growth over the medium term with potentially more upside in the share price on a recovery.
At the current prices, both stocks look cheap and could deliver attractive total returns once interest rates start to drop. I would probably split a new investment between Telus and Enbridge right now for a portfolio focused on total returns.
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The Motley Fool recommends Enbridge, TELUS, and Telus International. The Motley Fool has a disclosure policy. Fool contributor Andrew Walker owns shares of Telus and Enbridge.