Passive income investors should take advantage of some of the battered dividend plays while their yields are still larger than normal. Undoubtedly, recession fears and rate hike risks (the Bank of Canada recently raised rates again by 25bps on Wednesday) have really worked their way into the share prices of various dividend (or distribution) payers.
Though rates are now at highs not seen in more than two decades, I still think the Bank of Canada is starting to get extremely close to that finish line. Even if the rate hikes aren’t over quite yet, one has to imagine that we’re now in the late innings of the ballgame.
Of course, stubborn inflation needs to back off before the Bank of Canada can confidently state that the rate hikes are over. Regardless, it’s tough to tell if the “higher for longer” type of rate environment will be in the cards. I think rates may be nearing the peak, and in a few years, rates may be well lower than 5%.
Over the course of the next three to five years, I’d look for rates to gravitate lower in a slow and steady fashion. With that, today’s high-yielding dividend payers may be in a spot to enjoy a bit of multiple expansion, as their yields contract, potentially toward historical norms.
So, while today’s 6%-plus yields may seem less appealing, given today’s risk-free rate, consider how buying such a dividend stock could pay off over the long run when risk-free rates look to drop.
BCE stock: A 6.6%-yielder that’s getting enticing
Should rates fall in five years (it’s likely in my opinion), a name like BCE (TSX:BCE) and its 6.6% dividend yield look incredibly attractive! The best part is the dividend could stand to grow even further, as the company looks to continue rewarding investors for their patience.
In a 5% rate world, a 6.6% yield on a “risky” stock may be less intriguing than it would be in a sub-2% rate world. However, if we find ourselves in an environment where rates are in the 3–4% range (or less), that 6.6% yield suddenly is too good to pass up.
In that regard, long-term thinkers serious about boosting their long-term passive income stream ought to be excited by names like BCE despite the slate of headwinds (and lack of competitiveness versus risk-free rates).
At writing, shares are in the midst of a multi-month sell-off. At less than $59 per share, the stock looks like a compelling dip buy right here, given so much negative sentiment is already baked in.
Telus stock: A strong dividend growth stock for the next decade
Similarly, Telus (TSX:T) stock is a high-yield telecom play that could prove a wise bet for any dividend investor who seeks to build a passive income stream that’ll pay up over the next decade. The stock yields 5.74%. Almost a percent less than BCE.
However, Telus seems better positioned to also reward investors with capital gains over time. Today, the stock is around a 52-week low of $25 and change.
It’s all doom and gloom for the telecoms of late. Still, if you seek income and steady appreciation, it’s tough to top the stock right here. For now, don’t expect Telus stock to bottom suddenly. It could be a doozy as the recession nears. So, be ready to keep buying should shares tumble closer to the depths of 2020. Even a wonderful value stock can become even cheaper if the market’s tides get rough enough
