If you’re a retired Canadian investor, now may seem like a pretty compelling time to pick up a security that could give you a passive income raise.
Undoubtedly, the Bank of Canada is cutting rates, and they could cut more quickly than expected in the next year or two. Just because we expect lower rates doesn’t mean we’ll get them, however, especially if inflation makes its return in 2025. Indeed, inflation in Canada has nosedived at a quicker pace than in the U.S.
However, whether the Bank of Canada is lifting its foot off the pedal too soon remains the big question. With the central bank dealing with 50 bps (double-rate) cuts, I believe the risk of cutting too quickly could potentially set the stage for an inflation comeback scare at some point down the road. In that scenario, perhaps the rate cuts could hit the pause button for some time, allowing income investors additional time to get their fill of yield and elevated risk-free rates.
Of course, the future will always be uncertain. The Bank of Canada could keep cutting, and inflation may not be an issue again as we move into 2025. In that scenario, yield could grow that much scarcer as rates of one-year guaranteed investment certificates (GICs) fall below the 3.5% mark. Indeed, some retirees may already be concerned that their recently matured GICs stand to renew at a far lower rate (in some cases, close to 2%).
Moving ahead, I’d encourage income investors to diversify across GICs and dividend stocks. That way, they’ll be ready for all potential scenarios. Indeed, be prepared for more Bank of Canada rate cuts, but don’t be so shocked if they unexpectedly pull back on the pace of reductions in the new year if inflation goes from undershooting to overshooting the 2% level.
Fortis stock: A dividend stock fit for the retired
What are some dividend stocks to consider? Of course, the high-yielding telecom stocks boast handsome yields of over 7% right now. However, if you can’t afford a dividend cut, perhaps a name like Fortis (TSX:FTS) makes sense to pick up right here.
Yes, the yield is modest at 4%. However, you’re getting a great business that’s been faring well of late. Further, you’re not getting any ugly surprises going into the new year, regardless of what’s to happen with rates, the economy, or inflation. The electric and natural gas utility has a nice five-year investment plan to power steady dividend growth from here.
Though I’d personally be a buyer on a pullback below $58 per share, given its upside seems somewhat limited following its latest spike, I wouldn’t be afraid to start a position today with the plan of building into it over the next 18 months.
Between a 7% yield with limited growth prospects (like with a telecom) and a 4% yield with a steady, predictable growth trajectory, I’d go with the latter unless you’re looking for deep value! In any case, FTS stock is for the rest of us who want better sleep and no worries about a dividend reduction, pause, or anything of the sort.
The bottom line
Sure, you won’t get a big raise upon buying the stock today, provided your portfolio yields close to 4%. However, next year, you will get that 4–6% raise with the name as Fortis aims to hike its payout by single digits. And the year after? You’ll get another raise. Indeed, when it comes to keeping the raises coming in, FTS stock is a great bet.
