The stock market is showing signs of uncertainty as the 2024 interest rate cuts are not coming anytime soon. Some large dividend stocks have slowed or paused their dividend growth to tackle interest expense. Amid this uncertainty, some dividend stocks are doing fine as their cash flows remain less affected by high interest rates.
Three stocks ready for dividend hikes in 2024
A dividend hike is an opportunity to buy the stock at a lower price and get a higher payout. Companies pay dividends from the distributable cash flow (DCF) left after all operating and financing needs. As high interest rates increased the cash requirement for servicing debt, DCF reduced. Lower DCF forcing some companies to slow or pause dividend hikes.
Telecom giant Telus (TSX:T) has been growing dividends every six months. While its rival BCE paused its dividend hike this year, Telus continued announcing its first 3% hike for 2024 in January. The management is striving to keep up with its intent to increase dividends by 7-10% through 2025, even though its payout ratio has surpassed its 60-75% target.
Telus was not immune to rate hikes as its interest expense increased 48% year over year in the third quarter. Moreover, its payout ratio reached 88% due to accelerated capital spending. Despite this, Telus hiked its quarterly dividend per share by 3% to $0.3761 in the fourth quarter from $0.3636 in the previous quarter. It could announce another 3-4% hike in June as its leverage ratio of 3.82 is way below its permitted 4.25.
It means Telus’s net debt is 3.82 times its EBITDA (earnings before interest, taxes, depreciation, and amortization). If the company used all its operating profit to repay its debt, it could become debt-free in around four years. The lower leverage ratio shows Telus has the financial flexibility to grow its dividend by 7%. Once the Bank of Canada begins rate cuts, the interest expense will reduce, increasing Telus’s DCF to continue its dividend growth.
Real estate investment trusts (REITs) are good income stocks. However, declining property prices and rising interest rates reduced the fair market value and DCF, respectively. Some commercial REITs even paused distributions as their occupancy fell, hurting their rental income.
However, CT REIT (TSX:CRT.UN) is resilient to the above situation.
CT REIT has no issues regarding occupancy, as almost 92% of the properties are occupied by its parent Canadian Tire. Weak discretionary sales of automotive, hardware, sports, leisure, and houseware decreased Canadian Tire’s revenue by 2.1% in the first nine months of 2023. The retailer had to slow the implementation of its Better Connected strategy, under which it is modernizing its stores. CT REIT undertakes store enhancement of the ones it owns and charges a higher rent for them.
The retailer’s expansion strategy suggests that CT REIT will continue receiving rent from the existing store along with a 1.5% rent appreciation. And development, even though slow, will help the REIT earn higher rent. The REIT increases its monthly distributions in June. It is likely to continue with its 10-year routine and increase its distributions by 3-4% in June 2024, thanks to its resilient tenant Canadian Tire.
Canadian Utilities (TSX:CU) is a stock you can bank upon for dividend growth in any situation. The utility supplies electricity and gas to households and earns from the utility bills you pay. As your utility spending increases, Canadian Utilities earns more cash, helping it grow dividends. The company has already increased its 2024 quarterly dividend per share by 1% to $0.4531, maintaining its 51-year strong dividend-growth history.
While this dividend stock may not give you inflation-adjusted passive income, it will reduce your risk of a dividend cut in a weak economy. Once the interest rate cut begins, there could be some improvement in the dividend-growth rate.