There has never been a better time to be a passive-income investor, at least in my opinion. The days of TINA (there is no alternative) are gone, with impressive rates on risk-free assets like Guaranteed Investment Certificates (GICs).
These days, you can nab a GIC on a one- or two-year term with a rate well above 5%. Should the Bank of Canada (BoC) continue to raise interest rates to beat inflation, we may very well get a 6% GIC coming to a financial institution near you! Further, bond yields are looking quite attractive after one of the worst years of trading in recent memory!
Simply put, you do not need to take risks associated with stocks or other securities to make a decent return. However, as the old saying goes, higher risk does mean higher reward. And those who choose to take risks with stocks, I believe, can do even better than the risk-free rate.
Not only are certain dividend stocks (think the blue-chip darlings) more bountiful today than when rates were near zero, but they also look oversold and undervalued, with the potential for sizeable upside.
In this piece, we’ll look at two top picks for dividend investors seeking big passive income and greater upside.
Telus
Telus (TSX:T) is a Canadian telecom darling that’s been feeling the pain of high rates. The stock is flirting with the lows not seen in around three years. Investors who bought at the peak are now seeing their investment down well over 32%. Undoubtedly, telecoms aren’t the safest of high-yield plays, especially in the face of economic slowdowns. That said, I think they’re absolutely wonderful buys on dips. Why? Telecoms tend to sport sizeable dividend yields. When shares fall, the yield rises.
Today, Telus stock’s yield has risen to around 6.3%. While you could get close to that amount without taking any risk (say, a 5.4%-yielding GIC on a one-year term), I’d argue Telus stock has the potential for huge gains as the industry finds a bottom.
I have no idea when the bottom is in. But I think that once the relief rally sets in, Telus shares could be quick to recover. Sure, you could wait for such a move higher before jumping in, but the yield and upside potential will likely be way lower. Sometimes, you need to brave the dip to get the best value!
SmartCentres REIT
SmartCentres REIT (TSX:SRU.UN) is a well-run retail real estate investment trust (REIT) that’s also been clobbered, thanks in part to higher rates and macro headwinds. Shares are down more than 27% since their 2022 peak levels and have been dropping rapidly.
Like Telus, SRU.UN is a falling knife, but one with a yield that’s getting juicier with every big move lower. At writing, shares yield 7.73%. That’s enticing, especially given Smart’s distribution survived the 2020 market crash and initial COVID-19 onslaught. In the long term, the REIT is poised to expand into residential and mixed-use properties — a move that could drive upside.
Can Smart’s yield breach 8% or even 9%? Sure, but I view the distribution as well covered, making the REIT a compelling dip-buy as the markets get choppier going into autumn.
