At long last, America’s central bank is showing signs of dovishness. Undoubtedly, the battle against inflation is not over. Inflation could remain sticky and well above the 3% mark, making it difficult for the U.S. Federal Reserve to hit that desirable 2% level. In any case, the economy doesn’t seem to be running at full speed quite yet. And if it leaves room for a few rate cuts, the more indebted (and capital-intensive) firms may get a nice break.
In this piece, we’ll check out three dividend stocks that Tax-Free Savings Account (TFSA) investors look watch closely, as rates finally begin to trend lower over the next year and beyond.
BCE stock
BCE (TSX:BCE) is a Canadian telecom that’s currently struggling to climb out of its multi-year slide. The stock had a nice run in October and November before shares pulled back in mid-December, essentially wiping out most of the autumn season gains. With shares back to $51 and change, TFSA investors who missed the relief bounce may have another chance to pick BCE stock up at a nice discount and a 7.6% dividend yield.
Undoubtedly, BCE has issues that extend well beyond the macro environment. Even a few rate cuts won’t make BCE’s headwinds disappear. However, as more newcomers come to Canada and intriguing new mobile-connected devices (think connected cars, wearables and mixed-reality headsets) come to be, expect higher data demand to be a nice secular tailwind for the telecoms as a whole. Of course, such tailwinds won’t be able to fully offset a particularly nasty recession. Regardless, I see ample value in BCE shares for income investors willing to stick it out for five years.
Indeed, we could be in for much lower rates in five years. And BCE’s rich dividend may stand to yield far less as a result of capital appreciation.
Fortis stock
Up next, we have Fortis (TSX:FTS) stock, which has also seen its relief rally begin to falter in recent sessions. The stock is down just north of 5% over the past month and could be at risk of slipping even lower (towards $50 per share), as market volatility kicks it up a notch. Either way, I view the 4.33% dividend yield as juicy and coming at a low cost, with the stock currently trading at 17.33 times trailing price to earnings.
Fortis is a steady utility stock that’s been rocked again. I think the recent slip is worth pursuing if you’ve neglected the defensive portion of your TFSA or Registered Retirement Savings Plan!
Royal Bank of Canada
Finally, we have a leading Canadian bank in Royal Bank of Canada (TSX:RY), which I think will continue to fare well as rates begin to peak and retreat. The stock has been on a jarring run in recent weeks, soaring around 22% from its October lows. Indeed, the bank has really heated up and without too much notice! Of course, lower rates and less economic damage may help Royal Bank and the rest of the cohort really get their legs back after many years of choppy action.
The 4.14% dividend yield is rock solid and seems positioned to grow at a steady rate over the next decade. Sure, it would have been nice to buy RY stock back in October. But I still view shares as quite cheap at 12.6 times trailing price to earnings. The banks are back. And RY seems to be one of the leaders of the pack.
