In Canada, 5 to 6% is the average dividend yield of most dividend stocks (dividend yield is the annual dividend per share as a percentage of the stock price.). These same stocks now have a yield of 7 to 10% because of the dip in their stock prices. The short term may be turbulent, with stock prices expected to fall further until interest rate cuts bring some relief to debt-laden dividend companies.
This downturn has created an opportunity like the 2008 Financial Crisis or the 2020 pandemic dip. Those were tough times when many companies made difficult decisions. They faced the heat to survive and thrived when economic growth returned.
Three reliable dividend stocks under $50 with a 7%+ yield
Here are three stocks making tough decisions and facing doubts from investors. But they have the potential to thrive once the interest rates fall and economic growth returns.
Enbridge stock
Many retirees who invested in Enbridge (TSX: ENB) stock during the 80s and 90s are living in retirement from the dividend income. The company has a reputation for growing its dividend at a compounded annual growth rate (CAGR) of 10% for the last 29 years. And even at a time when high-interest rates affected the free cash flow of many companies, Enbridge maintained its dividend payout ratio within the guided range of 60 to 70%. The payout ratio is the percentage of free cash flow paid out as dividends.
Enbridge’s future growth prospects make it a reliable dividend stock. The company is acquiring three gas utilities in America. The acquisition will increase its debt, but the resulting operating income from these utilities and cost efficiencies will keep the debt within the guided range of 4.5 to 5.0 times its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
Enbridge will continue to build new pipelines, expand existing lines, put unused pipelines to use, and make strategic acquisitions to grow its cash flows steadily. It expects the next two years to see a slower dividend growth rate because of high-interest rates and higher capital spending in the natural gas business. However, things could likely normalize by 2027, and Enbridge might accelerate its dividend growth rate from 3% to 5% by 2027.
Timbercreek Financial
Timbercreek Financial (TSX: TF) provides short-term mortgages to commercial REITs. Ideally, a higher interest rate earned the lender higher interest income, and it shared this income with shareholders by offering a special dividend of $0.0575 per share in March in addition to its $0.69 annual dividend. Despite higher interest income, its stock price kept falling since the interest rate hike began as credit risk increased.
Timbercreek Financial saw a slowdown in new loans as high interest and falling property prices forced many commercial REITs to pause new developments. In the fourth quarter, it had a net mortgage portfolio balance of $946.2 million, with the weighted average interest rate for the quarter of 10%. The year 2024 could be transitional for Timbercreek Financial as future interest rate cuts will help build momentum in new loans. A lower borrowing cost could increase demand for loans and the lender has sufficient liquidity to tap this growth.
Now is a good time to buy this stock below $8 and lock in a 9% annual dividend yield.
BCE stock
BCE (TSX: BCE) stock has been falling throughout the high-interest rate environment, and a rate cut could reverse this trend. However, BCE’s headwinds go slightly deeper as it faces a tough regulatory environment. The telco is undergoing a massive restructuring from telco to techno. It is shifting to less-regulated cloud and security services that would form the base to support the 5G ecosystem.
The 5G will connect millions of devices to the cloud where data will be processed in real time. This will require a cloud infrastructure and security of the data. It is also upgrading its media business, which is undergoing digital transformation. This transition won’t be easy as it will close slow-growth businesses like radio stations and electronics stores. 2024 will be a difficult year for BCE, and it is prepared to take a hit on its free cash flow while keeping dividends stable. You can lock in an 8.6% annual dividend yield if you buy the dip.
