After the 5.8% March dip, the TSX Composite Index has surged 6.4%. But the factors that pulled the market down in March are just the beginning. These are challenging times, as the 4.5% interest rate has started showing its economic impact. Companies are postponing their growth plans to preserve cash, property prices are falling, and banks are expecting higher default rates.
Dividend stocks you want to hold in tough times
While economists believe the Bank of Canada has paused rate hikes, inflation numbers could change the central bank’s decision. If the central bank retains the 4.5% rate, such a high rate signals tough times ahead. With inflation making affordability challenging, investors seek a stock that can give assured passive income, even in a recession.
Several small- and mid-cap dividend stocks have slashed dividends this year to preserve cash: Algonquin Power & Utilities, Slate Office REIT, and True North Commercial REIT. More companies could follow, as high-interest expense strain their profits. In these tough times, two stocks are some of the safest bets for dividends and preserving investment.
Canadian Tire stock
Canadian Tire (TSX:CTC.A) sells discretionary products for home care, sports, and automotive. It is heavily exposed to inflation and slowing consumer demand. Investing in this stock may sound like walking into a tornado as a recession impacts consumer discretionary. But shareholders have priced in the inflation and rate hikes, pulling the stock down as much as 41% between May and December 2022. However, the stock recovered 30% year to date, as inflation eased and automotive demand recovered slightly.
While Canadian Tire’s 2022 revenue surged, its net income fell, as its operating expense increased due to increased IT and digital infrastructure spending. Despite slowing earnings, the retailer increased its dividends by 33%. A dip in consumer demand could impact its revenue but is unlikely to reduce dividends.
Canadian Tire’s retail business is supported by its financial services, gas stations, and real estate businesses. While inflation puts pressure on retail businesses, it increases loans on credit cards and gas revenue.
Completing 100 years of operations, the retailer has been growing dividends for 10 years. It paused its dividend growth for two years after the 2008 recession. But its stock surged throughout the recovery period. Its 2.1% dividend yield might not look attractive, but its recovery rally could grow your capital significantly. It can give dividends in a recession and capital appreciation in a recovery.
Telus stock
Another dividend-growth stock is telecom giant Telus (TSX:T). At a time when energy and bank stocks are slowing their dividend growth, Telus expects to grow its annual dividend by 7–10% in the 2023-to-2025 period.
While Canadian Tire paused dividend growth, Telus continued to grow dividends during the 2008 financial crisis as communication services are resilient. The growing dependence on the internet is unlikely to impact Telus’s cash flows. Moreover, the company has completed the accelerated capital expenditure for the 5G rollout. It expects to reap the benefits of this rollout in years to come.
Summing up
The two stocks might not pay a 6-8% dividend yield, but they are resilient and can preserve your cash while paying a small and steady passive income. These are tough times, and companies are having difficulty keeping up with high yields. The need of the hour is stability.
Invest a major portion of your portfolio in large-cap stocks with positive cash flows and assured revenue. Diversify some investment in growth stocks that have dipped due to short-term challenges but whose long-term growth remains intact. A balance across sectors, asset classes, and companies’ fundamentals can reduce risk and enhance rewards.
