Every stock market is different as it reflects a country’s geographic, economic, and political strength. The Canadian stock market has some of the best energy and mining companies because of its rich oilsands reserves. The U.S. stock market has some of the best tech stocks, German market engineering and automotive stocks, and U.K. market banking and insurance stocks. It is better to play by one’s strength in a weak economy.
Investing in Canadian market strengths
The current market scenario is uncertain. High-interest rates have slowed the economy. The oil price volatility caused by geopolitical conflicts has raised concerns of prolonged higher rates. A recession has not yet occurred, as it requires negative GDP growth for three consecutive quarters.
But signs show that a recession is coming as real GDP growth was negative and flat in the second half of 2022. Inflation has eased but is still above the central bank’s target rate of 2%.
Many small and mid-cap income stocks have slashed dividends. Bank stocks are trading at their lows since interest rate hikes began in May 2022. The real estate and banking sector is sensitive to interest rates as mortgages become expensive and credit risk increases.
At times like these, which are the best sectors for dividend investing?
Proven path for Canadian income seekers
Canada exports 99% of its oil and gas to America. It has some of the most expensive broadband plans and no regulated prices on broadband. That makes pipeline and telecom stocks an attractive dividend investing option.
Investing in market leaders is the safest option as they have survived several crises and prepared their business model for the worst.
Pipeline stocks
Among the pipeline stocks, Enbridge (TSX:ENB) remains the unbeatable leader operating North America’s largest pipeline infrastructure. Even though the energy industry is transitioning away from oil, Enbridge’s oil pipeline still holds value as it has become difficult to build new oil pipelines. Moreover, it is building new gas pipelines to take a 30% share of the North American natural gas export market.
Enbridge has been paying regular dividends for over 68 years without any dividend cuts. While there were instances when it paused dividend growth in the early years, the energy company refined its business model to handle crises. The outcome is 28 consecutive years of dividend growth. The 2020 pandemic did slow its dividend growth rate from almost 10% to 3%, but it can maintain a 3-5% growth rate as more gas pipelines become operational. And to sustain this growth, it is acquiring gas utility companies in America.
Telecom stocks
If you haven’t explored the telecom sector, add these two stocks to your portfolio: BCE (TSX:BCE) and Telus Corporation (TSX:T). Earlier, communications was not a strong dividend stock as it did not grow dividends regularly. But the 4G technology has changed a lot for telcos. It supported digital transformation, and made cloud services possible, and video calling and live streaming a reality.
5G technology is making artificial intelligence (AI) at the edge a reality with drone deliveries, smart cities, and autonomous cars. At the core of this technological revolution is a robust communication infrastructure that connects all devices to the cloud.
While many companies slowed their dividend growth and some even slashed dividends, BCE and Telus maintained over 6% dividend growth. Telus even accelerated its annual dividend growth rate to 7.3% in 2023 from 6.2% last year.
They are enjoying a strong uptick in 5G subscriptions. As the Internet of Things (IoT) proliferates and more use cases of AI at the edge emerge, the 5G subscription will also increase. AI will help telcos monetize their infrastructure for decades.
Canadian income seekers’ nirvana
Now is a ripe time to invest in the above three stocks as they trade closer to their 52-week lows. It is a once-in-a-decade opportunity to lock in a 6-8% dividend yield for several decades. And as these stocks are at their lows, the downside risk is also low.
