The markets are cautious as fears of a 2008-like recession loom in the macroeconomic indicators. The U.S. Fed interest rate is now at 5%–5.25%, a level last seen in 2007. The Fed maintained this rate for several months to control inflation by pulling down demand. But most of this demand was funded by loans, which led to the 2008 Financial crisis. At that time, dividend stocks held their end of the bargain and continued paying dividends and even increased them significantly during the recovery.
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Dividend deals you won’t want to miss
While the markets are more evolved, and chances are Canada can avert a recession, it is better to be prepared for the worst. The best dividend deals are the ones that are resilient to economic conditions and have the financial flexibility to take a hit on cash flows and still pay dividends.
A pipeline of dividend deals
Investing in Canada, you cannot ignore pipelines. They are at the heart of rich oil and gas resource transportation and help transmit them to the United States. And now, because of the sanctions on Russia, Canada is also preparing to export its liquefied natural gas (LNG) to Europe and some parts of Asia.
TC Pipelines (TSX: TRP) stock is at a sweet spot, trading closer to its lower range of $50. Some of its gas pipelines, like the U.S. Natural Gas Pipelines and the NGTL Systems, are making new delivery records. More volumes mean more cash flows. Even when LNG prices fall, TC Pipelines will not be affected significantly as 95% of its operating profits come from long-term supply contracts with regulated toll rates.
TC Energy has been increasing dividends even in the 2008 recession, the 2014 oil crisis, and the 2020 pandemic. It can continue growing and paying regular dividends in the event of recession as it has sufficient cash flow to service debt, pay dividends, and fund future projects. Moreover, the company aims to continue increasing dividends by 3-5% by bringing new pipelines into operation.
The pipeline stock is trading in the lower range as the company took a $3 billion hit for its Coastal GasLink project that went way over budget. But that was a one-time hit. Things will normalize as TC Energy taps the North America LNG export market. It is a good time to lock in a 6.8% dividend yield.
Dividend from communications
Telus Communications (TSX: T) is a good dividend deal wherein you can lock in a 5.3% dividend yield. It is Canada’s third-largest telecom operator and is expanding its 5G infrastructure aggressively. As of March 31, its net debt increased by $5.3 billion as the company purchased a spectrum license and made strategic acquisitions. The higher debt reduced its fixed rate debt to 80% from 90% a year ago. But most of the floating rate debt is due in 2024. With the Canadian central bank pausing interest rate hikes, Telus can manage its higher interest expense.
The higher capex also increased its dividend payout ratio to 89% from its targeted 60-75%. So far, the company is on track to grow its dividend by 7-10% every year till 2025. A significant change in the economic scenario could put a pause button on this dividend growth. But the company could continue paying dividends.
Holding dividends
Power Corporation of Canada (TSX: POW) is a financial services holding company. Its significant earnings come from Great-West Lifeco and wealth and asset management company IGM Financial. But it also holds shares of European investment firm Groupe Bruxelles Lambert and alternative asset manager Sagard. POW earns dividends from its holdings, which it passes on to shareholders.
Power Corporation has been paying dividends since 1998 and growing them, too. In the 2008 crisis, it paused dividend growth but continued paying dividends. Now is a good time to lock in a 5.89% dividend yield.
Investor takeaway
The above three stocks can diversify your dividend portfolio and give you regular passive income in uncertain times. If you are worried your investment might take a hit from a looming recession, these stocks can mitigate the downside risk and revive your portfolio during the recovery period.
