To stem inflation, the Federal Reserve has made a series of 11 interest rate hikes since March 2022, raising the benchmark interest rate to 5.25-5.5%, the highest in 22 years. With no clear signs from the Federal Reserve’s chief in his recent Jackson Hole speech, I expect interest rates to remain elevated in the near to medium term. So, here are three safe Canadian stocks you can buy in this high interest rate environment.
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Bank of Nova Scotia
Rising interest rates could benefit banks by increasing the spread between the borrowing and lending rates. So, I am selecting Bank of Nova Scotia (TSX:BNS) as my first pick. Last week, it reported a stable third-quarter performance, which ended on July 31. It generated a net income of $2.23 billion, 14.7% lower than its previous year’s quarter. However, it rose 2.4% sequentially, with Global Wealth Management and Global Banking and Markets segments posting solid performances.
BNS also strengthened its capital and liquidity metrics while increasing its provisions for future loan losses amid economic uncertainty. Its common equity tier-one ratio increased from 11.4% in the previous year’s quarter to 12.7%, while its liquidity coverage ratio also strengthened from 122% to 133%. Amid the strong second-quarter performance, BNS’s stock price has increased by 2.7%. Despite the increase, the bank trades nine times analysts’ estimated earnings for the next four quarters, which looks cheap. Also, it pays a quarterly dividend of $1.06/share, with its forward yield at 6.57%. So, amid improving financials and attractive valuation, I am bullish on BNS.
Dollarama
A high interest rate environment indicates a strong economy, with healthy employment numbers and robust consumer spending. So, I am choosing Dollarama (TSX:DOL), a discounted retailer with extensive presence across Canada, as my second pick. The company focuses on strengthening its direct sourcing capabilities, thus allowing it to offer its products at attractive prices.
Besides, the discounted retailer operates around 1,507 stores, with 85% of Canadians having at least one store within 10 kilometres of their surrounding. The average annual sales for stores opened within two years stands at $2.9 million and enjoys a payback period of less than two years, indicating its efficient capital utilization. Further, it has plans to add around 60-70 new stores every year, thus raising its store count to 2,000 by 2031. Also, Dollarcity, where the company has a 50.1% stake, has plans to add over 400 stores in the next five years. So, the contribution from Dollarcity could increase in the coming years. Given its solid underlying business and healthy growth prospects, I believe Dollarama would be a safe bet in this high interest rate environment.
Canadian Natural Resources
A strong economy will increase the demand for oil and natural gas. The decline in production amid voluntary production cuts by the Organization of Petroleum Exporting Countries and its allies could support oil prices in the near to medium term. So, I have chosen Canadian Natural Resources (TSX:CNQ) as my final pick.
The company has planned to invest around $5.4 billion this year, strengthening its asset base. Supported by these investments and solid underlying business, the company expects its production to increase by around 5.5%. Also, its low-decline asset base and efficient operations could boost its financials in the coming quarters.
The oil and natural gas producer has also rewarded its shareholders through share repurchases and dividend hikes. It has raised its dividend at a compound annual growth rate of 21% for the previous 23 years, with its yield currently at 4.04%. Considering all these factors, I believe CNQ would be an ideal buy right now.
