The Bank of Canada announced a 50-basis-points rate cut on October 23, reducing the interest rate to 3.75%. A rate cut is good news for high-leverage companies burdened by higher interest expenses for more than two years. An accelerated rate cut will bring some respite to their bottom lines and support dividend growth.
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Two RRSP stocks to buy in October
While many stocks hurt by high interest rates have already completed their recovery rally, a few stocks still have room for appreciation. Buying these stocks at the dip in your Registered Retirement Savings Plan (RRSP) will help you lock in a higher dividend yield and attain capital appreciation.
If you are to retire in the next two to three years, these stocks will help you fight inflation with their dividend growth. And if you have a long time to retire, you can compound the returns by reinvesting the dividend money to buy more stocks of the same company or other companies that generate growth.
Telus stock
Telus (TSX:T) stock began its descent from its all-time high in April 2022 when interest rate hike began. It is now trading near its pandemic lows. It would be tough for the stock to reach its 2022 high again, as competition has intensified in the telecom sector with the consolidation of Rogers and Shaw. A sector that did not compete over prices due to its oligopoly nature went into a price war and hurt its profits.
A lot depends on the regulatory scenario around the access of the giant’s fibre network to competitors. As these complexities unfold, Telus stock would rally to its average trading price of $28. As for the dividends, you can lock in a 7% yield if you buy the stock now.
A higher interest expense on its increased debt displaced Telus from its net debt target of 2.2 and 2.7 times its EBITDA (earnings before interest, tax, depreciation, and amortization). At the end of the second quarter, this ratio was 3.85 times. The accelerated interest rate cuts will help Telus reduce these ratios. Its dividend-payout ratio has already reduced from 87% in the June 2023 quarter to 83% in the June 2024 quarter. The rate cuts could see the ratio return to its target range of 65-70% in less than a year, giving the management the flexibility to continue with the 7% dividend growth in 2025.
A 7% dividend growth with a 7% yield in the Telus dividend-reinvestment plan (DRIP) could help you compound your RRSP passive income in the long term. A 7% growth can also help you fight inflation.
RioCan REIT
RioCan REIT (TSX:REI.UN) unit price has dipped 25% since March 2022, and the most obvious reason was the interest rate hike. This hike affected RioCan in two ways. Its $7.5 billion debt includes $2.7 billion in mortgages. The rate hike significantly increased its interest expense. Moreover, higher rates slowed house sales, which led to the company pausing new constructions. With rates falling, house sales will resume and free up capital for the real estate investment trust (REIT) to repay its mortgage and fund future development projects.
A reduction in interest expense will help increase EBITDA and reduce the net debt to EBITDA ratio from nine to eight times.
The REIT slashed its distributions during the pandemic, which gave it flexibility to manage development and mortgages. It is now paying 63% of funds from operations (FFO) as distributions, way below the peer average of 73.5%. The REIT has been growing its distributions for the last three years and could increase it in 2025 as well.
Considering the REIT’s property portfolio is largely located in the Greater Toronto Area, where the average income of individuals is high, it will enjoy higher rent for its properties. Moreover, the improvement in its balance sheet and a recovery in property prices could push the unit price upwards in the coming years.
Now is the time to buy the unit price while it trades below $20 and lock in a 5.74% yield.
