The Canadian stock market doesn’t just look a tad cheaper than the U.S. indices, most notably the S&P 500; it also looks quite yield-heavy. Indeed, higher rates have dealt a heavy blow to a wide range of firms. Amid their tumbles, their dividend yields have risen considerably. In a low-rate world, a “safe” or well-covered dividend payout with a yield north of 7% would be very hard to come by. You’d probably have to risk your shirt on a distressed firm with a horrid balance sheet to score such a name in a low-rate world.
These days, rates are much higher, as are the yields on a growing number of stocks. The good news for income investors is that these 7% yielders aren’t as risky as they would be if rates were markedly lower, perhaps at early-2020 levels. Further, there are higher growth firms that boast yields (3-4%) that are also well above historical averages, providing the perfect mix of growth and passive income.
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Higher-for-longer rates could bring forth bigger market bargains
Of course, there’s a high degree of risk with some of the names, many of which are feeling the pain of higher rates. With inflation creeping higher (just shy of 3%) in the latest reveal, the Bank of Canada may have to stand pat on further rate cuts going into the second half. Whether the inflation data pushes a rate cut into the fourth quarter of 2024 or some point into the next year remains to be seen.
Regardless, one cut to rates may be all we’ll get for the summer and perhaps the rest of the year. The rate-sensitive stocks and real estate investment trusts (REITs) have already reacted negatively, however, dipping notably in recent sessions. I think the recent wave of pain could be a huge buying opportunity for investors looking for a cheap stock to hold for the next five years.
Indeed, rates can stay higher for quarters to come. But when we look at the trajectory year by year, I think the rate-driven dip in various names is overblown. Here are two bargains that make a lot of sense to pounce on this July.
Telus
Things went from back to worse for Telus (TSX: T) stock, which recently shed over 4% in the last two and a half sessions. Undoubtedly, T stock is at new multi-year lows again, with the dividend yield (7.4%) close to multi-year highs.
With shares down 40% on the back of macro headwinds and jitters over a “higher for longer” type of rate environment, I’d argue now represents a great time for contrarians to top up. The road ahead will not be smooth. In fact, it could be met with even bigger bumps on what could be a road to much higher levels.
Though only time will tell if T stock falls to the teens, I find the dividend to be worth the price of admission, provided you’re looking for income and are willing to hold for the long haul.
Canadian Apartment Properties REIT
Canadian Apartment Properties REIT (TSX: CAR.UN) is a very high-quality residential REIT for investors who want exposure to the Greater Toronto and Vancouver Area rental markets. Both markets remain red-hot. However, the left hook of high rates has continued to leave a scar on CAR.UN. Indeed, the burden of higher rates has been felt for a number of years now, with shares down more than 30%.
Despite the pressure, I still view CAPREIT as an eventual winner once rates really start coming down. As always, the timing of rate cuts will be tough. But if you’re in it for many years, the high-growth REIT seems like a bargain while it’s yielding 3.6%.
We’ll have to wait a while longer for rate relief, but investor patience will be worthwhile, in my opinion.
