Where to Invest as the Bank of Canada Drops Interest Rates

Last week, the Bank of Canada reduced interest rates by 0.25% to 4.75%, making it the first central bank in the G7 to initiate an easing cycle. Moreover, regulators emphasized that they might lower interest rates further if inflation is less than 2%.

It’s evident that the path to lower interest rates is largely dependent on inflation, which touched multi-year highs in 2022. Further, geopolitical tensions, elevated home prices, and robust wage growth numbers may derail the Bank of Canada’s easing measures in the near term.

The Bank of Canada lowered its interest rates for the first time since 2020, as inflation fell to 2.7%. The country’s gross domestic product (GDP) grew by 1.7%, which was weaker than expected. It seems that higher interest rates have negatively impacted economic growth, which has helped lower inflation.

In the last two years, companies in capital-intensive sectors such as infrastructure and energy have underperformed the broader markets as the rising cost of debt weighed heavily on cash flows and profit margins. However, several companies across sectors should benefit from lower interest rates going forward. Here are two TSX stocks you can consider buying as the Bank of Canada drops interest rates in 2024.

Enbridge stock

Among the largest companies in Canada, Enbridge (TSX:ENB) also offers you a tasty dividend yield of 7.5%, given its annual dividend payout of $3.66 per share. Last year, Enbridge made a bold move amid a challenging macro backdrop as it announced plans to acquire three natural gas utilities from Dominion for $19 billion. The company believes adding natural gas utilities at an attractive multiple should increase cash flow per share while improving its earnings stability and growth profile.

Once the acquisition is closed, Enbridge’s oil pipelines will account for 50% of EBITDA (earnings before interest, tax, depreciation, and amortization), followed by natural gas pipelines at 25%, natural gas utilities at 22% and clean energy at 3%.

In the last 29 years, Enbridge has raised dividends by an average of 10% annually. However, its recent dividend hike was much lower, at 3%, which suggests it will be unlikely for the TSX energy giant to replicate its historical growth rates. Enbridge stock is a top investment choice for investors looking to create a passive income stream at a low cost.

Brookfield Infrastructure Partners stock

Another TSX stock that has underperformed in recent years is Brookfield Infrastructure Partners (TSX:BIP.UN), a company that operates a diversified portfolio of businesses such as utilities, transport, data infrastructure, and midstream.

Around 90% of Brookfield’s earnings are tied to long-term, fee-based contracts as well as government-regulated rate structures, allowing the company to generate steady cash flows across market cycles. Additionally, 70% of its cash flow has no exposure to commodity prices or volumes, and 85% is protected from or indexed to inflation.

Brookfield Infrastructure aims to grow its funds from operations (FFO) by more than 10% in 2024 to US$3.25 per share, up from US$2.95 per share in 2023. So, BIP stock is priced at less than nine times forward FFO, which is really cheap.

In addition to its dividend yield of 5.7%, analysts expect BIP stock to surge by 32% in the next 12 months.