Dividend stocks seem quite timely as we head into October. September was undoubtedly turbulent and has continued to be, even with the TSX Index flirting with new heights. Remember, volatility goes in both directions, even though it’s often referenced when stocks are headed down by a painful amount.
With September kicking off with a dip, we only experienced a sudden surge in the back half of the month; thanks to that large rate cut from the U.S. Federal Reserve (the Fed), investors may be confused as to what they should do with extra cash that’s just sitting on the sidelines.
Indeed, valuations aren’t incredible right here. However, as rates come down, so too will the risk-free rate and the days of Guaranteed Investment Certificates (GICs) boasting well north of 4%.
Undoubtedly, the days of 5% GICs seem to be gone, with rates on one-year maturity GICs now hovering just north of 4%. That’s still a pretty decent rate, but as rate cuts keep coming from the Bank of Canada, it may not be long until rates are closer to 3%.
Are you ready for markedly lower interest rates?
Indeed, risk-free investors have been spoiled by higher rates on investments free from risk. And while today’s slate of 4%-rate GICs seem to be weak in comparison to the 5%-rate ones we could have punched our ticket to less than a year ago, I’d argue that today’s GICs may be a better deal when it comes to real returns (or returns adjusted for inflation).
Indeed, in Canada, inflation’s pretty much back to normal at 2%. However, with GIC rates around 4%, you’ll actually score a pretty decent 2-2.5% real return from such risk-free investments compared to nearly 0% when inflation and rates were both at around 5%.
Indeed, whenever you can outpace inflation by a little bit, you can get ahead. And while I continue to view GICs as an essential part of any diversified portfolio, I’d encourage investors to be ready to consider options once your next GIC matures and rates aren’t anywhere close to 5%. Indeed, 3% rates on GICs aren’t all too attractive. The good news is that with dividend stocks, you’ll be able to keep collecting the dividend yield, regardless of where rates head.
Telus stock
Indeed, Telus (TSX:T) stock sports a 6.81% dividend yield at writing. And it’s yours to keep assuming the telecom doesn’t slash its payout in response to company pressures. Personally, I think Telus’s payout, though stretched, is secure. As rates lower, Telus will have a bit more flexibility to pursue initiatives to jolt its cash flows.
At writing, the stock is down nearly 33% from its all-time high. And while a full recovery seems off the table for now, I do think dip-buyers could walk away with a locked-in dividend and a good shot at year-end capital gains as investors fully digest just how good the rate cuts will be for Canada’s top telecoms.
In addition, Telus stock may just have what it takes to gain strides over rivals that seem weighed down by their media segments. With signs of turning a corner and a low 0.72 beta (which entails less market risk), Telus stock seems like a great value buy for long-term dividend lovers.
