Since the start of 2018, Canada’s top dividend stocks have disappointed investors. BCE Inc. (TSX: BCE)(NYSE: BCE), a widely held Canadian telecom operator, is down about 10% this year against the 1% decline in the broader market.
The main reason of investors’ apathy towards large-cap, dividend-paying companies such as BCE is Canada’s rising interest rates, which have pushed the bond yields higher. When bond yields rise, investors generally shun dividend stocks, as they hope to get a better return from the safe-haven government bonds than riskier equities.
So, are there any signs that show that the Bank of Canada is done with rising interest rates? Any change in the monetary policy is very important for dividend stocks to outperform the market. Let’s have a deeper look.
Mixed economic performance
Canada’s economic data during the first quarter has presented a mixed picture so far. While job creation and retail sales have been relatively strong, inflation remains within the central bank’s range, which it closely monitors to make decisions about the future direction of interest rates.
In April, for example, Canada’s annual inflation rate cooled modestly to 2.2%, short of economist expectations for 2.3%. The monthly retail data for March, however, showed the largest sales gain in five months.
The Bank of Canada has raised its benchmark interest rate three times since July to leave it at 1.25%. Chances of another hike at the May 30 announcement sank to 35% from nearly 50% before the inflation data, according to Reuters.
Despite some encouraging signs on the economic front, I think the Bank of Canada will prefer to stay on the sidelines until we have some conclusion of the ongoing free trade discussions with the U.S. A potential deal on NAFTA is important for Canada because it ships 75% of its exports to the U.S.
Outlook for BCE stock
Telecom utilities such as BCE generally move in opposite direction to interest rates. Assuming that Bank of Canada is still in rate-hiking mode, we’re unlikely to see a major rebound in the BCE’s share price.
That said, I think this pullback is a good buying opportunity for long-term income investors who are interested in buying and holding this top dividend-paying stock. The company has invested tens of billions of dollars in everything from wireless to data lines to media assets. BCE is rapidly expanding Canada’s broadband fibre and wireless network infrastructure, with annual capital investments surpassing $4 billion.
Trading at $54.17 and with an annual dividend yield of 5.5%, the highest when compared to the company’s five-year average yield, I think BCE stock offers a good bargain for long-term investors.
