November saw a rebound in the stock market after the U.S. Fed kept its interest rate unchanged at 5.25%–5.5%. Higher interest rates took a toll on dividend stocks. Their share price fell as interest expense on their debt increased. Some fell as they slowed their dividend growth to keep funds for rising interest expenses, and some fell due to fear of a recession. At times of uncertainty and recession, some of the best investment options are dividend aristocrats and resilient stocks.
Why do interest rates impact dividend stocks so much?
Rising interest rates increase the borrowing cost for all forms of debt, new and existing. The Bank of Canada increased the interest rate from 0.25% in March 2022 to 5% in July 2023, significantly increasing the interest expense. Businesses and consumers who took a bigger loan at a floating rate in 2021–2022 are feeling the pressure as their interest expenses more than doubled, putting downward pressure on profits.
Dividend stocks carry huge debt on their balance sheet but earn stable cash flows. Some examples are railway, pipeline, utility, energy, telecom, bank and real estate stocks. While they can sustain a gradual rise in interest rates, sustaining an accelerated jump for a long time is difficult. And if a recession hits, the overall consumer demand falls, hurting business revenue.
At such times, only those with manageable debt and stable cash flows sustain a recession without dividend cuts. Small and medium-sized businesses are likely to cut dividends as their cash flows are relatively small and debt high. But even large businesses could pause or slow dividend growth, using dividend cuts as their last resort.
Two dividend stocks to buy in November 2023
The U.S. Fed warned of a rate hike towards the end of the year. While the chances of that happening looks bleak, you cannot let your guard down, as a prolonged 5% interest rate can still hurt dividends. Therefore, when choosing dividend stocks for November, look for those with manageable debt and sustainable cash flows.
Enbridge stock
In these difficult times, I would avoid investing in bank stocks as they are vulnerable to the economic situation. Enbridge (TSX:ENB) has a relatively lower correlation to the economic situation. The toll money will keep coming even if pipelines don’t operate at full capacity. As the temperature drops, demand for natural gas will increase, irrespective of the economic scenario. The energy infrastructure giant will be able to sustain the 2023 dividend per share and even grow it by 3–5% next year.
While Enbridge is taking on more debt to fund its acquisition of U.S. gas utilities, it has enough cash flow to make regular repayments. This stock is a buy at any time, especially now, as the stock price decline has alleviated its dividend yield to 7.6%.
CT REIT
Like Enbridge, CT REIT (TSX:CRT.UN) has high but manageable debt and stable cash flows. It has the backing of Canadian Tire, its parent and the key tenant leasing more than 90% of its properties. Unlike other REITs, CT REIT has had high occupancy even in difficult times. As it does not develop and sell some of its properties, a temporary dip in property prices does not affect the regular cash flows and distributions.
CT REIT even increased its distribution per share this year, while many commercial REITs slashed theirs due to reduced occupancy. While CT REIT has its own risk of too much dependence on Canadian Tire, things look stable. It has the potential to sustain a recession without dividend cuts.
Investor takeaway
There are several investing styles. But when it is difficult to predict the market, investing in evergreen dividend stocks is a safer option. These stocks don’t attract the attention of short-term traders easily because of their low volatility. Thus, you can find peace of mind by putting your money in their low-risk business model and getting passive income.
