High Inflation: The Good and the Bad for Canadians

Consider tucking away some of your long-term savings in quality dividend stocks like Brookfield Infrastructure in this correction.

| More on:
You Should Know This

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

High inflation has direct impact on the everyday lives of Canadians. Thankfully, Canadian investors can position themselves better financially.

The bad in high inflation

First, let’s start off with the bad in high inflation. Just when we thought the inflation of 6.8% in April was bad, Statistics Canada reported inflation hitting 7.7% in May 2022, the biggest jump since January 1983. Already Canadians are feeling a lighter wallet at the gas pump, grocery store, and pretty much at every part of our lives. Canadians, particularly, those with many mouths to feed, are concerned their income cannot keep up with the ridiculously high inflation.

The Bank of Canada has been doing its job by raising the key interest rate target three times this year to 1.5%. The central bank essentially indicated it’ll make more hikes if inflation doesn’t get back in line. The inflation rate has a long way to go before it returns to the long-term target rate of 1-3%.

Interest rate hikes will cascade down to all kinds of credit, including mortgage rates, personal/commercial lines of credit, etc. This, in turn, increases Canadians’ borrowing costs and interest expense.

The good in high inflation

High inflation leading to rising interest rates aren’t all bad. For example, interest rates we get from our banks for our savings accounts and GICs are also increasing. Bond yields are also rising. This means our emergency funds and lower-risk investments can earn higher interest income.

Canadians who have excess cash to invest for longer term can also benefit from this situation. The stock market is correcting, providing value opportunities in quality dividend stocks like Brookfield Infrastructure Partners (TSX:BIP.UN)(NYSE:BIP).

The global utility stock has long-life, cash-cow infrastructure assets in utilities, transportation, midstream, and data. It’s diversified. It generates quality and sustainable cash flow of which approximately 90% is regulated or contracted and 70% is indexed to inflation. Yes, inflation! So, high inflation speeds up its overall cash flow growth.

BIP’s interest expense are predictable and has little impact from rising interest rates in the near to medium term, because about 90% of its debt is fixed rate.

So far, the dividend stock has corrected more than 16% from its peak and provides a more attractive yield of 3.9% for a defensive utility. To be clear, “defensive” is in terms of the strength of the business and the sustainability of its cash flows. Due to the macro environment, the stock will likely trade cheaper over the next months, providing an even better opportunity to accumulate shares in the wonderful business.

Brookfield Infrastructure is a value stock that targets cash distribution growth of 5-9% per year, supported by healthy cash flow growth.

Canadians’ takeaway

While we cannot control if we will get a raise from our jobs to combat inflation, we can target to save a percentage of our after-tax income and invest it in solid dividend stocks, like Brookfield Infrastructure, that pay growing cash distributions.

By buying a basket of quality and diversified dividend stocks at great value in this market correction, Canadians can pretty much guarantee growing investment income to fight inflation and the increased cost of living.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

The Motley Fool recommends Brookfield Infra Partners LP Units. Fool contributor Kay Ng owns shares of Brookfield Infrastructure.

More on Dividend Stocks

Money growing in soil , Business success concept.
Dividend Stocks

Got $4,000? 4 Simple TSX Stocks to Buy Right Now

The macroeconomic environment is tense but investing can be simple. Here are four stocks to buy now and book your…

Read more »

Growth from coins
Dividend Stocks

What’s More Effective: 1 Growth Stock or 1 Dividend Stock for High Returns?

Let's settle the age old debate. If you had invested in a huge growth stock or a solid dividend stock,…

Read more »

money cash dividends
Dividend Stocks

Need a 2nd Income? 3 Stocks (With Monthly Dividends) to Buy and Hold

Need extra cash? These cheap Canadian stocks pay monthly dividends and are offering lucrative yield to start a passive-income stream.

Read more »

Gold king in chess game face with the another silver team on black background (Concept for company strategy, business victory or decision)
Dividend Stocks

2 Canadian Dividend Aristocrats to Buy in August

These two Dividend Aristocrats could help Canadian investors earn consistent passive income, even in difficult economic times.

Read more »

Increasing yield
Dividend Stocks

2 Canadian Stocks to Buy With Dividends Yielding More Than 3%

Investors can now buy top TSX dividend stocks at cheap prices for TFSA and RRSP portfolios focused on passive income…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

TFSA Investors: 3 Dividend Stocks That Pay You Monthly

Starting a monthly passive income from your TFSA won't just help with a few small routine expenses; it will also…

Read more »

The sun sets behind a high voltage telecom tower.
Dividend Stocks

BCE Stock: A Dividend Heavyweight That Could Take Share From Rogers

BCE (TSX:BCE)(NYSE:BCE) stock is a nearly 6% yielding behemoth that could skyrocket, as it takes share from rivals.

Read more »

data analyze research
Dividend Stocks

New Investors: 2 Great Long-Term Picks to Consider Today

New investors searching for long-term picks can consider adding these two TSX stocks to their portfolios.

Read more »