2 Dividend Stocks to Play the “Rate Pause”

Royal Bank of Canada and Canadian Apartment Properties REIT are great investments to consider as rates show signs of peaking out.

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TFSA investors shouldn’t wait until the U.S. Federal Reserve (the Fed) announces some sort of interest rate pause. Undoubtedly, last year saw a tonne of rate hikes as central banks duked it out with high levels of inflation.

Though the Bank of Canada is already poised to pause, it’s the Fed that tends to be the bigger mover of global share prices. And at this juncture, there’s some uncertainty as to when the Fed will stop its hikes and get ready to cut. As investors weigh the Fed’s commentary, markets are sure to overreact in either direction.

Heck, ChatGPT and other AI technologies may be good at deciphering the Fed chatter. In any case, I’d look to focus on the long term as a TFSA investor seeking to put new money to work today. At the end of the day, it’s inflation that’s calling the shots. If inflation doesn’t back down, the Fed may not have much room to be dovish as it looks to land the economy as softly as it can.

Dividend stocks are intriguing for TFSA investors looking pause the play in rates

In this piece, we’ll look at two dividend stocks that I think are a great way to play a potential rate pause. As the Fed looks to follow in the trail of the Bank of Canada, I think undervalued dividend plays could have room to the upside, even if the recession kicks in sooner rather than later.

Arguably, it’s better to be an investor when you hear the word “recession” non-stop in the mainstream media. Why? Expectations tend to be lower, paving the way for more upside surprises. Indeed, long-term investors in it for 10-15 years need not worry about the next 10-15 weeks. If anything, steep pullbacks should be preferred as they provide an opportunity to get wonderful businesses at even lower prices.

Currently, Royal Bank of Canada (TSX:RY) and Canadian Apartment Properties REIT (TSX:CAR.UN) are compelling.

Royal Bank of Canada

Royal Bank’s a legendary bank with a massive $186.7 billion market cap. Though shares of the top bank have wobbled over the past year and a half, don’t count on it crumbling just because a soft-landing recession will hit.

As bank investors, we’ve felt the turbulence that comes with economic downturns. Slowed loan growth and provisions could take away from earnings over the nearer term. Though higher rates could translate to higher NIMs (net interest margins), the negative effects of rates (sluggish loan growth) could be a net negative for the banks. In any case, Royal has the tools to power through a rate-driven recession en route to a post-pandemic environment that could see lower rates and normal inflation.

Still, the long-term looks promising and should have the focus of TFSA investors. At writing, shares of RY yield 3.98%. That’s a safe payout that’s subject to impressive and consistent growth over time. At 12.8 times trailing price-to-earnings, I’d nibble away at the resilient bank while banking headwinds are still on the minds of investors.

Canadian Apartment Properties REIT

CAPREIT is one of my favourite REITs to hold for the long haul. Technically, the name is a growth-centric REIT, with a below-average 3.03% yield and a good amount of capital gains over the last 10 years. Over this span, shares have nearly doubled.

More recently, though, CAPREIT has felt the heat of macro headwinds and higher rates. As rates begin to pause and eventually fall, CAPREIT could be in a spot to make up for lost time. Higher rates can act as a thorn in the side of a “growthy” firm seeking to expand its reach. As rates fall in time, look for CAPREIT to be one of the bigger upside movers.

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.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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