When considering fixed-income investments for retirement, bank deposits are the first thing that pops into your mind. Even the Big Six bank stocks have accompanied many Canadians through their retirement. They have decades of dividend-paying and dividend-growing history. However, rising interest rates have increased credit risk for banks.
Many Canadians are feeling financial stress because of rising mortgage payments. If the interest rates remain high for a longer term, default rates might increase. Such fears have pulled Canadian bank stocks closer to their 52-week low. A lower stock price made their dividend yields attractive.
Looking beyond the big banks for dividends
However, having only bank stocks for passive income could be risky. Canada is home to some good dividend stocks that offer attractive yields. While they may not have a long dividend history, their higher yield makes up for the risk. Some of these stocks could become the future Dividend Aristocrats.
Now is a good time to buy into their growth journey and inflate your passive income. Please note that some of these stocks might slash dividends in the short term, but they might make up for the cut with growth.
Power Corporation of Canada
Power Corporation of Canada (TSX: POW) is a financial services holding company that earns dividends from its two major operating companies, Great-West Lifeco and IGM Financial. These companies are undergoing restructuring to unlock value for shareholders. The restructuring reduced their earnings in the second quarter.
Moreover, the bearishness in the banks and the financial services industries has impacted the share price of POW. The weakness in the financial services industry could encourage POW to stall dividend growth till things stabilize. The risk of dividend-growth stagnation is offset by its high yield of 6.37%. POW’s stock has dipped 14% since September.
While there is a risk, there are higher yields. Once the risk subsides and economic recovery begins, the company could accelerate its dividend-growth rate, making up for the no-growth years.
ATCO stock
Another holding company but in a different sector is ATCO (TSX: ACO.X). It is the parent company of Canadian Utilities, a Dividend Aristocrat with 50 years of dividend-growth history. ATCO also has operations in constructing and leasing houses and commercial real estate.
Unlike bank stocks, ATCO is less sensitive to interest rates and has a cushion of stable cash flows from electricity and natural gas transmission. While high interest rates pulled down real estate business, high energy prices boosted cash flow from utility businesses.
ATCO has sustained the 2015 oil crisis and the 2009 Financial Crisis without dividend cuts. It has the financial flexibility to sustain the current market weakness without affecting its dividends.
Telus stock
Another sectoral diversification pick for dividends is Telus (TSX: T). It is among the top three telcos that enjoy a broad customer base and a stable cash flow from subscription revenue. The 5G rollout has ample scope for scaling and connecting everything to the internet. Telus has been growing its dividend for the last 20 years and has one of the highest dividend-growth rates. It has been growing dividends every six months for the last few years.
Telus stock has dipped to its pandemic low, creating an opportunity to lock in a 6.5% dividend yield. It is a once-in-a-decade opportunity to lock in a higher yield and dividend growth. For $22.12 a share, you can get an annual payout of $1.45 that will grow half-yearly. You can also grow your invested amount as the stock price surges with the economic recovery.
Investor takeaway
Buying the above dividend stocks at their pandemic lows can boost your passive-income portfolio. A recession could keep the share price low for some time. Make the most of this bearishness and invest in these stocks. Even if a company slashes dividends, an economic recovery could pull the stock price and make up for the dividend cut in the long term.
