The risk-free rate has continued to climb this year. And with the U.S. Federal Reserve staying the course with its battle against high inflation (the latest minutes left the door open to further interest rate increases), it seems like the rate pause and cut that many hoped for may still be further down the line.
Indeed, more rate hikes are always a possibility, even as the Fed winds down with its tightening. But that doesn’t mean we’ll find rates much lower in the first half of next year. Even if no more hikes are to come, we need to be ready for a scenario that sees rates staying at these heights, even as inflation becomes less of a concern.
Sure, inflation is less concerning than it was a year ago. But there’s always a chance it could come back. And that’s the real risk of a pivot on monetary policy at this juncture. For now, high rates on risk-free assets seem tempting.
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Heightened risk-free rates make it tough to bet on dividend stocks!
An investment like a GIC (Guaranteed Investment Certificate) can offer more than 5% on a term of around one or two years. That’s a return that’s guaranteed and free from the risk of losing principal. Of course, you’ll have your investment locked for some period of time. However, many risk-averse investors may find the lack of liquidity a lesser risk, especially as valuations in the broader stock markets swell in certain corners.
Undoubtedly, many Canadian investors may be asking themselves why they’d bother taking a risk if they can score 5.2% or so in a GIC. Though stock markets are hot this year, it’s hard to argue that tech, specifically U.S. mega-cap tech, has been the leader, while most other corners (think high-yielding industries like pipelines, banks, and telecoms) have been lagging.
Even if technology’s year-to-date leaders turn to laggards in the final quarter of 2023, I still think the high-yielders may not be in for too much in the way of punishment from here. At least not to the magnitude of some of the red-hot high-flyers in tech!
Telus stock’s 6.3% dividend yield is incredibly bountiful
At this juncture, I find it hard to pass up Telus (TSX:T) with a yield that’s now at 6.3%. Shares have lost nearly a third of their value from peak to trough. And though there are no technical signs of a bottom in sight, I’m a fan of the dividend stock for long-term investors who want to secure the payout for the next decade.
Even if risk-free rates stay elevated for the next two years or so, it’s very likely we’ll reach peak rates at some point over the timespan, perhaps over the next year. And if rate cuts are thrown into the cards, the days of 5% GICs may be coming to an end. Once your GIC matures in a year or two, it’s unclear what the renewal rate will be. My guess is it’ll be lower.
If it is, Telus’s current yield looks that much more attractive.
I view Telus’s dividend as safe and think rate reductions over the next few years could be a source of share price appreciation, as the yield adjusted to the downside. Buyers of the stock today, though, will secure that 6.3% yield. If you’re in it for the long run, I’d argue Telus and the broader basket of telecoms are too good to ignore as their yields swell to multi-year highs.
