Rate Cut Tailwinds: A Dividend Dynamo Ready to Fly

SmartCentres REIT (TSX:SRU.UN) is a great high-yield play to own if you think rates will fall off from here.

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Interest rate cuts are seen as quite a big tailwind for stocks as a whole. Undoubtedly, high rates have acted somewhat like gravity on the valuations of a broad range of firms. The companies that need to spend money to make money (or grow their cash flows) have been severely impacted by the rate surge to fight off higher inflation.

Not to mention, inflation has also hurt the consumer in a big way. In a way, high rates and inflation acted as a one-two punch to the temple of some firms. As always, though, time is a great healer. And going into the second half of 2024, perhaps some ailing firms could stand to thrive as investors look for a rate cut tailwind of sorts to propel multiples and growth profiles.

More rate cuts coming: Time to invest accordingly in battered, rate-sensitive names

Now that we’ve seen a top (hopefully) in rates and inflation, the hope is that multiples will expand again as firms look to gain some of their growth edge back. When rates are low, and cash is flush, we could find many corporations crank up expenses, buybacks, and perhaps even acquisitions.

As always, though, it’s never a good idea to time the market, the Federal Reserve in the U.S., or the Bank of Canada on this side of the border. At the end of the day, the timing of rate movements matters less if you’re looking to grow your wealth over the next 10-20 years.

The high-rate headwind could fade fast

Macro turbulence comes and goes, and so too do high inflation, macro headwinds, and economic crises. Not to mention that even the ugliest of black swans just swim on by when given the time. That’s why new investors should be thinking longer term rather than giving too much focus to the commentary surrounding when central banks will cut next. For the Fed, it seems to be in September. And for the Bank of Canada, I would look for the second rate reduction to arrive at about the same time.

Without further ado, consider SmartCentres REIT (TSX:SRU.UN), a screaming buy in my books as rates, inflation, and yields on various securities look to move lower from here.

SmartCentres REIT

SmartCentres REIT has been hurting badly in recent years, with shares down more than 33% from early-2022 highs. What’s to blame? Higher rates have increased the burden of the REIT’s debt load. Indeed, REITs, in general, tend not to be the biggest fans of elevated interest rates.

As rates go from high to low, look for the headwind to be replaced with a tailwind. In addition, SmartCentres aims to be a growthier REIT with many mixed-use properties in the pipeline. Such growth bets to beef up future cash flows are quite expensive, more so when rates are higher than average.

Perhaps once rates fall and Smart is able to achieve a bit more flexibility with its balance sheet, shares will kick off a rally as investors finally look to lock in the juicy distribution, currently yielding 8.3%. For now, the payout seems stretched. Further, the shares look obscenely undervalued, assuming rates are headed much lower from current levels. I don’t know about you, but I don’t think the first rate cut will be the last for the year.

However, with one of the best tenants on Earth, Walmart, anchoring many locations and occupancy rates that are still healthy, I would not sell SRU.UN shares right here. If anything, I’d be willing to double down, as the rate tailwind could kick in at any time, perhaps before the Bank of Canada’s next rate cut.

For now, Smart could ride on the strength of Walmart, a bix-box retailer that’s thrived amid inflation, and could continue to do so as wealthier consumers continue to shop there, not just for the low prices but the much-improved in-store experience.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has positions in SmartCentres Real Estate Investment Trust. The Motley Fool recommends SmartCentres Real Estate Investment Trust and Walmart. The Motley Fool has a disclosure policy.

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