The TSX market has been in a bear momentum since the 2022 tech bubble burst. Rising interest rates and inflation have left little money in the hands of individuals for investment. When you don’t have a surplus, you tend to be cautious with your usage. The central bank kept increasing interest rates to tame oil-led inflation. This reduced investors’ risk appetite and shifted them to dividend stocks.
Why are dividend stocks attractive in a bearish market?
Growth stocks derive value for shareholders by increasing the stock price. A bearish market prevents stock prices from rising as investors are in a sell-or-hold mode. The rising inflation encouraged investors to hold more cash to meet growing expenses, and high-interest rates have made fixed-income securities attractive.
Those who invest in stocks moved from growth stocks to dividend stocks after most tech stocks fell after the 2022 tech bubble burst. Dividend stocks derive value for shareholders from the regular dividends they give per share. Dividend stocks trading on the TSX give an average dividend yield of 4-6%. This yield is higher than the 3.25-4.25% interest bank deposits offer.
The bearish market momentum pulled down the stock price of dividend stocks, increasing their yield. (Dividend yield = dividend per share as a percentage of stock price). Investors grabbed this opportunity to lock in a higher yield of 6-7.5%.
Two TSX stocks paying big income in a bearish market
The TSX Composite Index is down more than 16% since the first interest rate hike in March 2022. Here are two value stocks trading near their lows, giving you an opportunity to lock in a higher yield.
TC Energy
While other oil and gas pipeline stocks fell moderately, TC Energy (TSX:TRP) stock dipped 22% from its June 2022 peak when oil price reached US$125/barrel. It underperformed peers after its Keystone Pipeline suffered a major oil leak in December 2022. The stock barely started recovering in January. But an increase in the cost estimate of the Coastal GasLink pipeline project in February pulled the stock price down.
The above two projects have burned a hole in TC Energy’s pocket. It can recover the environmental restoration cost incurred due to the oil leak from insurance. But the ballooning cost of the gas pipeline has impacted its earnings. TC Energy has added the $3 billion incremental costs of the Coastal GasLink project as an expense, which reduced its earnings per share to $0.64 in 2022 from $1.87 in 2021.
Once this pipeline comes into operation and starts earning toll money, it will add to the cash flows and make up for years of going over budget. The pipeline is 83% complete. The company expects to complete it by the end of 2023 or 2024. The company is also investing in building more pipelines and repairing older ones.
The management aims to maintain its 23-year-long streak of growing dividends by targeting a 3-5% dividend-growth rate.
Scotiabank stock
Bank of Nova Scotia (TSX:BNS) stock has fallen 26.5% since the interest rate hike began in March 2022, underperforming four of the top five banks. A high interest rate is a good sign for banks, as they can charge higher interest on loans and earn higher net interest income.
But Scotiabank underperformed, as it funds most of its loans from wholesale funding that carry a higher interest rate. The bank uses wholesale funding for business loans in Mexico, Chile, Peru, and Columbia, which have a higher risk and higher returns. The high exposure to wholesale funding has put pressure on Scotiabank’s margins reducing its net income by 15% in the first quarter.
Scotiabank has a higher interest rate risk. But it has adequate capital to withstand rising credit risk in a recession. It has been growing dividends in 43 of the last 45 years and is likely to maintain its dividend per share even in a recession.
Investing tip
The bearish momentum has created an opportunity to buy the above two stocks at a discount and lock in a higher dividend yield (6.6% for TRP and 6% for BNS) than their five-year average yield (5.24% and 5%).
