Soaring interest rates are hammering the share prices of leading Canadian dividend stocks, but the pullback looks overdone in many cases.
A recession of some degree is likely on the way, and the Bank of Canada will have to reduce rates at some point to avoid a deep economic slump. In that situation, investors should consider owning great dividend-growth stocks that tend to boost their payouts every year. When interest rates pull back, dividend stocks should also catch a new tailwind.
Fortis
Fortis (TSX:FTS) is a utility with $64 billion in assets spread out across Canada, the United States, and the Caribbean. Natural gas distribution, electric transmission, and power generation businesses make up the bulk of the operations. Fortis gets 99% of its revenue from rate-regulated assets, so cash flow tends to be predictable and reliable. These are essential services that homes and businesses require, regardless of the state of the economy.
Fortis recently raised the dividend by 4.4%, marking the 50th consecutive year of dividend hikes. The trend is expected to continue, supported by the five-year capital plan that will see Fortis invest $25 billion through 2028. These initiatives will boost the rate base from $36.8 billion in 2023 to $49.4 billion. As cash flow increases, Fortis plans to raise the dividend annually by at least 4% over the next five years.
Fortis trades near $54 per share at the time of writing. The stock caught a nice tailwind over the past week but is still way down from the $61 it fetched in May.
Investors who buy Fortis stock at the current level can get a 4.4% dividend yield.
Telus
Telus (TSX:T) trades for less than $23 per share at the time of writing compared to more than $34 at the peak last year. High interest rates and challenges at the company’s subsidiary Telus International will impact profits in 2023, but overall consolidated revenue is expected to grow by nearly 10% compared to last year, supported by the core mobile and internet subscription businesses.
As with power and natural gas, mobile and internet services are needed by people and businesses in all economic conditions, so Telus should be a good stock to own during a recession.
Telus has increased the dividend annually for more than two decades and often hikes the payout twice in one year. At the current share price, investors can get a 6.4% dividend yield. That’s a great return, even if the share price doesn’t move much higher.
Telus completed its copper-to-fibre transition before the surge in borrowing costs. The company still has capital projects on the go to drive growth, but the annual investment level is expected to be lower than it has been in recent years. This should help free up more cash for distributions.
The bottom line on top TSX dividend stocks
Fortis and Telus pay attractive dividends that should continue to grow. If you have some cash to put to work in a portfolio focused on passive income and total returns, these stocks look cheap today and deserve to be on your radar.
