The Bank of Canada implemented a series of aggressive interest rate hikes a couple of years ago to combat red-hot inflation. Through higher interest rates, the central bank’s aim was to slow economic activity down and cool inflation. Lower inflation rates are ultimately better, but the high-interest-rate environment needed to achieve it can be devastating.
Besides affecting consumers, higher borrowing costs significantly impacted publicly traded companies. Most stocks rely on heavy debt loads for capital expenses. When interest rates soared, so did their expenses due to higher interest payments, weighing on their financials. Several top Canadian dividend stocks saw a substantial pullback in share prices over the last two years.
Now that the Bank of Canada is finally enacting some cuts in key interest rates, bargain hunters looking for stocks that can see share prices appreciate in the coming months should start making moves. This is why we will discuss two dividend stocks that are well-positioned to deliver such growth.
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TC Energy
TC Energy (TSX:TRP) is a $54.18 billion market capitalization giant in the Canadian energy industry headquartered in Calgary. TC Energy develops, owns, and operates energy infrastructure in Canada, the U.S., and Mexico. It transports natural gas, crude oil and other hydrocarbons in the region through its extensive pipeline network.
Pipeline companies like TC Energy have massive capital budgets. Building new pipelines takes several years, and the cost of each project runs somewhere in the billions of dollars. Quite often, pipeline projects go over their budget by a significant margin.
The Coastal GasLink project for TC Energy is the perfect example. The expected cost was around $7 billion, but the project underwent several delays. Upon completion recently, its total cost was around $14.5 billion.
Further cuts in interest rates can spell great news for TC Energy and its investors. As of this writing, the stock trades for $52.22 per share and boasts a 7.35% dividend yield.
BCE
BCE Inc. (TSX:BCE) is a $40.89 billion market capitalization industry-leading telecom stock. Like pipeline companies, telecoms also cost billions of dollars in capital projects. It costs several billion annually to upgrade its network and ensure that customers have access to wireless and wireline broadband capacity.
While the company uses its revenue to fund capital projects, it also relies on debt to fund parts of it to keep itself financially sound. Due to higher borrowing costs, its profits have seen a significant drop, eating into liquidity that it can use for share buybacks or distributions to shareholders. Fortunately, its performance has improved in recent weeks.
Its first-quarter earnings report for fiscal 2024 showed its media segment improved its performance. To adjust to the changing market environment, BCE also sold off several radio stations and reduced programmatic across the television group.
Combined with significant staff reductions, the company has successfully managed to improve its bottom line. Falling interest rates can mean far better performance for the company in the next few quarters.
As of this writing, it trades for $44.86 per share and boasts a juicy 8.89% dividend yield that you can lock into your portfolio at current levels.
Foolish takeaway
While central banks are cutting interest rates, it might take several years for Canada to even come close to historical lows. There is no way to tell when a high inflation rate environment might rear its ugly head again, leading to more market volatility.
Buying and holding dividend stocks with reliable track records for paying shareholders their dividends can be an excellent strategy. Even when share prices go down, you can keep getting returns through regular distributions. When the next bull market finally arrives, you can see the value of your investment grow through capital gains.
