Money is starting to flow back into TSX dividend stocks as interest rate cuts by the Bank of Canada push down rates on fixed-income alternatives. Investors who missed the bounce are wondering which top Canadian dividend stocks are still undervalued and good to buy for a self-directed Tax-Free Savings Account (TFSA) focused on passive income.

Enbridge

Enbridge (TSX:ENB) fell from $59 in June 2022 to as low as $44 in October last year. At the time of writing, Enbridge trades near $53 per share.

The decline largely followed the most aggressive timeframe of rate hikes in Canada and the United States. In fact, the rebound started around the time market sentiment shifted from fear of more rate increases to expectations of rate cuts in 2024. The latest leg of the recovery has been spurred by consecutive 0.25% rate cuts in Canada. In the United States, economists widely expect the U.S. Federal Reserve to start trimming rates as early as next month.

Enbridge uses debt to fund part of its growth program, which includes acquisitions and capital projects. A drop in interest rates reduces borrowing expenses, which helps boost profits. Lower debt expenses also free up more cash that can be used to pay dividends or shore up the balance sheet.

Enbridge is in the process of completing the third leg of its US$14 billion purchase of three American natural gas utilities. These businesses generate reliable and predictable cash flow from rate-regulated assets. Enbridge is also working on a $24 billion secured capital program to drive additional revenue and cash flow growth.

Global oil and natural gas demand are expected to remain robust for decades, even as the world transitions to renewable energy. Enbridge's investments in oil export and liquified natural gas (LNG) export infrastructure put it in a good position to benefit. The company moves 30% of the oil produced in Canada and the United States and about 20% of the natural gas used by Americans.

Enbridge raised the dividend in each of the past 29 years. Anticipated annual growth in distributable cash flow is 3% until 2026 and 5% starting in 2027, so steady dividend increases should be on the way.

Investors who buy ENB stock at the current level can get a dividend yield near 6.9%.

Bank of Nova Scotia

Bank of Nova Scotia (TSX:BNS) trades near $64.50 at the time of writing. The stock is up from $55 last October but still sits way below the $93 it reached in early 2022.

Soaring interest rates put pressure on businesses and households that are carrying too much debt. As a result, Bank of Nova Scotia and its peers raised provisions for credit losses (PCL) in recent quarters to cover potential defaults. Lower rates should lead to stabilization of PCL in the coming months and PCL reductions, or even reversals next year, as long as there isn't a spike in unemployment.

Anticipation of rate cuts led to the rebound from November 2023 to the end of March this year. The pullback over the past five months is due to smaller rate cuts than expected by the Bank of Canada and a delay in rate cuts by the American central bank. Recession fears have also entered the minds of bank investors.

Near-term volatility should be expected, but Bank of Nova Scotia remains very profitable and already looks cheap at the current level, and investors can get a decent 6.6% dividend yield while they ride out additional potential turbulence.

The bottom line on top TSX dividend stocks

Enbridge and Bank of Nova Scotia pay attractive dividends that should continue to grow. If you have some cash to put to work in a TFSA targeting passive income, these stocks deserve to be on your radar.