U.S. Debt Ceiling: Is It Safe to Invest Right Now?

The U.S. debt ceiling is in the headlines again. You can play it safe by investing long term in wonderful businesses that pay good dividends.

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Should you be worried about the U.S. federal debt ceiling? As Investopedia explains, “The debt ceiling is the maximum amount of money that the United States can borrow cumulatively by issuing bonds.” It exists to keep the U.S. national debt levels in check.

Investopedia further elaborates, “Over time, the debt ceiling has been raised whenever the United States has approached the limit. By hitting the limit and failing to pay interest payments to bondholders, the United States would be in default, lowering its credit rating and increasing the cost of its debt.” In recent years, the U.S. debt hitting the ceiling has made headlines, which has led to increased short-term volatility in the financial markets.

Investors do not need to be overly worried, though. The U.S. debt remains one of the highest-rated in the world. Standard & Poor’s last downgraded the U.S. national debt from the highest credit rating of AAA to AA+ in 2011.

Additionally, at the end of the day, investors simply need to focus on long-term investments in wonderful businesses and target to buy at good valuations. If you invest your long-term capital in a diversified portfolio of solid companies with investment-grade credit ratings that tend to increase their profits over time, your overall investment portfolio should be fine.

The most conservative investors could consider buying the best Canadian stocks on weakness.

RBC stock

Here’s an example of a quality stock you can think about buying for the long haul. Royal Bank of Canada (TSX:RY) is as diversified and resilient as it gets when it comes to the Canadian banks. Higher interest rates and an expected recession this year are weighing on the big banks, which in turn has pushed up their dividend yields.

RBC’s core businesses include personal and commercial banking and wealth management operations that make up approximately 40% and 30%, respectively, of their revenues. It also has a meaningful business in capital markets and businesses in insurance, and investor and treasury services.

It’s an uncommon opportunity for conservative investors to pick up the blue chip stock at a dividend yield of 4.5% or greater. At $121.45 per share at writing, the dividend yield of 4.45% is very close to that threshold. At this price, analysts believe the stock trades at a discount of 10%.

Brookfield Infrastructure

Brookfield Infrastructure Partners L.P. (TSX:BIP.UN) leads its sector in terms of quality, diversification, and total returns. The management has been superb, helping drive total returns – a compound annual growth rate of about 15.4% in the last decade or so.

The top utility stock should remain resilient in a recession. It owns and operates critical and essential long life infrastructure assets, such as energy transportation, storage, and processing, regulated transmission, diversified terminals, rail, toll roads, and data transmission, distribution, and storage.

At $48.78 per unit at writing, it offers a cash distribution yield of approximately 4.3%. Moreover, analysts believe BIP.UN trades at a meaningful discount of 20%. The stock has increased its cash distribution for 14 consecutive years. For reference, its five-year cash distribution growth rate was 6.6%.

The sustainability of its cash flow with more than 80% protected from or indexed to inflation and its sustainable payout ratio are reasons to believe that its dividend growth will continue from here. Management targets cash distribution growth of 5-9% per year.

Investor takeaway

The “debt ceiling” will pop up in headlines now and then. Investors should get used to it. Those who don’t need their money for a long time (say, five years or longer) should feel comfortable parking their money in a diversified basket of quality businesses like Royal Bank and Brookfield Infrastructure Partners, especially since these names pay good income and will increase their dividends over time. Aim to buy them on weakness, particularly in market corrections.

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 Kay Ng has positions in Brookfield Infrastructure Partners. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy

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