High inflation and interest rates are generally bad news for Canadians. On the bright side, it has provided some of the best deals for investors to make passive income in dividend stocks. Investors can expect their dividends from these stocks to grow over time. If you’re ready for a volatile ride, you can investigate these ideas.
Image source: Getty Images
goeasy is a great deal
The leading non-prime Canadian consumer lender, goeasy (TSX:GSY), could gain more business in a relatively high inflationary and interest rate environment. According to the Canadian Lenders Association, based on TransUnion’s data at the end of 2021, about 27.8% of the Canadian population is considered non-prime. Capital tightening under a higher rate environment may be pushing more people to be non-prime.
This may have supported management’s belief in a continued expansion of its operating margin through 2025 to north of 38%. As well, goeasy also anticipates the return on equity to remain at at least 21%. Still, higher interest rates and the federal government capping the maximum allowable interest rate to 35% per year for the industry could weigh on the stock.
At about $112 per share at writing, the credit services stock trades at about 8.6 times adjusted earnings, which is a meaningful discount of approximately 30% from its long-term normal valuation. This aligns with the analyst consensus across seven analysts, according to TMX. A reversion to the mean could drive upside of about 17% per year over the next five years.
Let’s not forget that the dividend stock also yields 3.4%. Its recent payout ratio of about 32% of net income is sustainable. It also has the ability to continue solid dividend growth in the long run. For your reference, its 15-year dividend-growth rate is roughly 18.6%.
Brookfield Infrastructure is on sale
Higher rates have resulted in a correction in the utility sector, which naturally has a lot of debt on the balance sheet. Brookfield Infrastructure Partners (TSX:BIP.UN) stock has outperformed the sector and the Canadian stock market in the long run, as displayed as an example in the 10-year graph below.
BIP.UN, XUT, and XIU Total Return Level data by YCharts
Brookfield Infrastructure has about 90% of its funds from operations (FFO) that is contracted or regulated. And over 80% of its FFO is indexed to inflation. However, there could be some lag time for the translation of the recently relatively high inflation to the cash flow.
On a sustainable payout ratio and targeted organic FFO growth of 6-9% per year, management aims to increase its cash distribution by at least 5% per year. Additionally, it is diligent in recycling capital from de-risked or mature assets into better risk-adjusted opportunities.
The dividend stock is down 23% in the last 12 months, and it’s a fabulous opportunity for long-term investors to accumulate shares. At $35.54 per unit at writing, the stock offers a juicy yield of close to 5.9%. Analysts believe the undervalued stock trades at a substantial discount of about 37%.
To be clear, just because dividend stocks are on sale, it doesn’t mean they won’t become cheaper. Negative investing sentiment in the financial markets could weigh on stocks longer than investors think. So, it’s helpful to invest over time at attractive prices through low-cost platforms or even at no trading costs at National Bank of Canada or Wealthsimple and plan for a long-term investment horizon for your capital.
