Income investors and contrarians searching for big yields and a shot at decent capital gains are wondering which top TSX dividend stocks might be undervalued right now and attractive to buy for a self-directed portfolio.

Buying unloved stocks takes courage and requires the patience to ride out the additional downside, but the strategy can deliver solid total returns on a rebound.

TD Bank

TD (TSX:TD) traded as high as $108 in early 2022. The stock then went into a downward slide that recently took the share price as low as $74 before bargain hunters halted the pullback. At the time of writing, TD is back up to $80, and more upside should be on the way, but the path might be choppy.

TD definitely looks cheap at this level. The bank remains very profitable and has a large capital cushion to ride out some turbulence. As interest rates continue to decline in Canada and eventually begin to fall in the United States, there should be more support for bank stocks due to the anticipated reduction in provisions for credit losses.

TD, however, has some company-specific issues that have hindered the stock. The company is being investigated by U.S. regulators for not having adequate systems in place to identify and halt money laundering. Uncertainty around the outcome of the process is the main reason the stock has been under added pressure.

TD recently announced it will set aside an initial amount of US$450 million to cover potential fines. Analysts speculate the final penalties could be in the range of US$2 billion to US$4 billion. Fines at the upper end of this estimate would wipe out a large chunk of TD's excess cash and could force the bank to raise funds through a share sale. In that situation, the stock could take a new hit.

Analysts are also concerned about growth. TD could be told to shelve expansion initiatives in the American market until it can prove to regulators that the issues have been solved. Getting to that point will likely drive up expenses and could take some time.

As such, more bad news could quickly send the stock back to the 12-month low. That being said, TD will eventually get the problem under control, and it continues to be a very strong bank. Investors who buy the stock at the current level can get a dividend yield of 5.1%, so you get paid well to wait for the rebound.

BCE

BCE (TSX:BCE) has historically been a top pick among income investors who liked the stock for its stable cash flow coming from essential services delivered in a market with relatively few serious competitors. Over the past two years, however, the stock has pulled back considerably, falling from $74 in 2022 to around $43. This is a low not seen in more than a decade.

The capital destruction is bringing tears to the eyes of pensioners and other long-term holders of the stock. Soaring interest rates over the past two years are largely to blame. BCE is also facing revenue challenges in its media businesses due to ad spending shifts from television and radio to digital alternatives. Price wars on mobile and internet packages over the past year haven't helped the situation.

Near-term headwinds should be expected, but the worst of the rout should be in the rearview mirror. The Bank of Canada has already started reducing interest rates. This will lower BCE's borrowing costs and should free up more cash to support the dividend. BCE announced staff cuts of around 6,000 positions over the past year to adjust the business to the current conditions. The benefits to the bottom line should show up next year. Price cuts should also start to ease.

BCE currently trades near $45.50. At this level, the dividend provides a yield of 8.75%. The payout should be safe, assuming BCE is able to hit its goal of keeping revenue and adjusted earnings before interest, taxes, depreciation, and amortization stable as it navigates the various headwinds.

The bottom line

Additional downside is certainly possible for TD and BCE. However, the stocks already look cheap and pay attractive dividends that ease the pain during the volatility. If you have a contrarian investing style, TD and BCE deserve to be on your radar right now. A shift in market sentiment could easily send these stocks materially higher.

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