Canadian retirees need to get as much income as possible out of their savings without taking on too much risk.
Dividend stocks vs GICs
In the good, old days, GICs, government bonds, and even savings accounts paid enough interest to avoid taking on the risk connected to stocks. In recent years, however, interest rates and bonds yields have fallen significantly. That trend accelerated in 2020, as financial markets responded to the pandemic.
Inflation might creep in and start to push rates higher in the next few years, but there is no guarantee if or when that might occur. As a result, dividend stocks might be the best game in town to get decent returns for quite some time.
Best dividend stocks
In the current environment, it makes sense to buy stocks that have low betas. This means their share prices tend to hold up well when the broader stock market takes a hit. Company-specific issues can certainly trigger large moves in either direction, but the goal is to buy low-risk businesses.
Ideally, the companies get much of their revenue from recession-resistant operations. Steady cash flow supports existing dividends through challenging times and helps drive dividend growth when the economy recovers.
Let’s take a look at Fortis (TSX: FTS)(NYSE: FTS) and Telus (TSX: T)(NYSE: TU) to see why they might be interesting picks for an income-focused portfolio.
Fortis
Fortis is a Canadian utility company with $57 billion in assets located in Canada, the United States, and the Caribbean.
The significant U.S. presence gives Canadian investors decent exposure to the American economy through a Canadian stock. This is useful when shares are held in a TFSA to ensure all the dividends remain tax-free.
Fortis receives most of its revenue from regulated businesses. Power generation, electricity transmission, and natural gas distribution all provide steady streams of cash flow. The pandemic lockdowns in 2020 have reduced electricity usage by commercial clients, but this is partly offset by a rise in use by homeowners. As the economy reopens, conditions should normalize.
Fortis has a large capital program underway that will increase the rate base significantly in the next few years. As a result, cash flow is expected to rise at a steady pace, and the board intends to raise the dividend by about 6% per year through 2024.
The current dividend provides a yield of 3.6%.
Telus
Telus is a major player in the Canadian communications industry. The company provides mobile, internet, and TV services to clients across its world-class wireless and wireline networks.
Telus doesn’t own media assets. This means the company avoided some of the pain endured by its two largest competitors in recent months.
Instead of spending big bucks on sports teams, TV networks, and radio stations, Telus invested heavily in its digital health business in recent years. Telus Health really came into the spotlight in 2020. Pandemic restrictions saw many health professionals adopt Telus Health solutions to maintain connections with their patients. Digital disruption in the health industry is just beginning, and Telus Health is a leader in the Canadian market.
Telus has a strong track record of dividend growth, and investors should see that trend continue. At the time of writing, the distribution provides a 4.75% yield.
The bottom line
Fortis and Telus are top-quality companies that provide reliable dividends supported by recession-resistant businesses. If you are seeking income stocks that won’t keep you up at night, these names deserve to be on your radar.
