I’m writing this on Wednesday, December 11, which happens to be the date the Bank of Canada just announced its latest jumbo 50-basis-point (0.5%) interest rate cut. This cut brings the overnight lending rate banks typically lend to each other at 3.75%, which is much lower than where the U.S. overnight Fed Funds rate currently sits.
While many have expected these lower rates to spur demand, the Canadian economy continues to see relatively slow growth, so more rate cuts could be on the horizon. Indeed, until this trajectory of cuts wanes, investors should probably take the central bank at their word that the normalization trend will likely continue.
If that’s the case, it’s best not to fight the Bank of Canada on this one. Here are two top stocks I think are worth considering if you’re one of the many investors who want to bet on lower interest rates in Canada moving forward.
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Canadian Apartment Properties REIT
Canadian Apartment Properties REIT (TSX: CAR.UN) is one of Canada’s largest residential real estate investment trusts (REITs). The trust manages a diversified portfolio of rental apartments, townhomes, and manufactured housing communities across Canada, providing housing to a Canadian market that’s seen strong population growth in recent years, largely due to the country’s immigration policies.
Immigration and urbanization continue to dominate the discussion around catalysts for the housing sector. However, interest rates also matter a great deal when it comes to how properties are valued, and the extent of rent increases can be pushed forward. With the Canadian consumer still largely bogged down by debt, continued interest rate cuts should push disposable income higher, leading to less in the way of delinquencies and improving the overall growth profile of REITs moving forward.
I think CAP REIT is an interesting option to consider in this space, due to the trust’s focus on residential real estate. Given the underlying secular growth factors I previously mentioned, this is a REIT that’s uniquely exposed to some very strong growth trends I think should benefit investors who may be worried about a repeat of inflation picking up in a lower interest rate environment.
We’ll have to see how the whole inflation and growth discussion plays out in the Canadian market. But with a dividend yield of 3.4% and a share price that’s been beaten down of late, this is a top rebound play I’ve got on my radar for the rest of the year.
Royal Bank of Canada
Among its peers, few banks are as massive and reliable as Royal Bank of Canada (TSX: RY). The leading financial institution in Canada (and one of the largest banks in the world), Royal Bank remains a top option many long-term investors continue to look at in the Canadian market.
Indeed, I think it makes sense that Royal Bank is widely considered to be a cornerstone investment for anyone seeking stability and growth within a diversified business model, including personal banking, wealth management, and capital markets.
As the Bank of Canada changes interest rates, widened interest margins often benefit banks such as Royal Bank of Canada. Higher interest can increase the profitability of lending and boost earnings. Moreover, the bank’s business is not simply a conventional bank. Wealth management and insurance segments are considerable revenue generators and help reduce dependence on interest income and give a cushion during difficult economic times.
While being headquartered in Canada, Royal Bank of Canada is increasingly internationalizing its operations, especially in the U.S. and Europe. Diversification on the geographic dimension mitigates some risks arising from an economic slowdown domestically. It is marked by a long history of uninterrupted dividend payments and has had consistent dividend growth. The 3.25% dividend yield that it offers attracts income-seeking investors.
Furthermore, the bank continues to invest in digital transformation, ensuring that the customer experience is seamless through advanced mobile and online solutions. In doing so, it bodes well for future business growth while furthering the pleasure of its customers.
