The Bank of Canada’s September interest rate cut to 2.5% was well-received by the market, as lower rates are good for stocks in general. But lower rates typically boost some stocks more than others. This is what I’d like to explore in this article today.
Here are three TSX dividend stocks that I think should benefit from lower interest rates, and that I’m especially bullish on.
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Why did the Bank of Canada lower rates?
I’d like to start off by reviewing the macroeconomic environment that brought us here. The economic shutdown of 2020 during the pandemic drove the Bank of Canada to lower its rate to 0.25%, where it stayed until February 2022. This helped rescue the economy from a disaster, but inflation became a big concern soon after. Thus, the Bank of Canada subsequently raised the rate back up to recent highs of 5% in July of 2023.
As of May 2024, the easing cycle began again as fears of an economic slowdown took hold. Today, here we are at 2.5%, with the Bank of Canada issuing some alarms about the economy. The economy is weakening, the labour market is softening, and geopolitical tensions remain. All of this factored into the decision to lower interest rates.
Let’s take a look at the three TSX dividend stocks that should benefit greatly from falling interest rates.
BCE
BCE Inc. (TSX:BCE) is one of Canada’s leading telecom companies. It’s also one of Canada’s biggest disappointments of recent years. As you know, this once untouchable telecom giant actually got into a situation that forced it to cut its dividend, something unimaginable just a few years ago.
Today, the company has taken many steps to turn things around. This has included laying off some of its staff, divesting of non-core businesses, and generally streamlining and improving efficiencies. The proceeds from these efforts have gone to paying down debt.
Yet, BCE is still highly leveraged, with $32 billion in total long-term debt and a debt-to-total capitalization ratio of 67%. With lower interest rates, the interest payments that come with this debt will fall, leaving more money for BCE to invest back into the business and return to its shareholders.
Northwest Healthcare Properties REIT
Real estate investment trusts are another group of companies that stand to benefit from declining interest rates. Northwest Healthcare Properties REIT (TSX:NWH.UN) is another company that got into trouble due to high debt levels. When interest rates rose, it too had to slash its dividend.
Today, Northwest has also taken steps to sell non-core properties and raise the efficiency of the organization. This has been rewarding, and Northwest is in much better shape today than it was back in 2023.
Yet, Northwest also remains highly leveraged, with $2 billion in long-term debt and a debt-to-total market capitalization ratio of 53%. This means that falling interest rates and the resulting lower cost of borrowing will benefit Northwest’s financials greatly.
Fortis
The utility industry is another capital-intensive industry that benefits from falling interest rates. Although Fortis Inc. (TSX:FTS) has not gotten into trouble due to its balance sheet, it’s also carrying a lot of debt – $31 billion in long-term debt and a debt-to-total capitalization ratio of 57%.
Fortis’ business is highly predictable, and it generates steadily growing earnings and cash flows. I like this stock because it is another defensive one that can shelter our portfolios from economic weakness and volatility.
The bottom line
I’ve highlighted three TSX dividend stocks here that stand to benefit from lower interest rates due to their heavily indebted balance sheets and their capital-intensive businesses. But they’re also attractive because of the defensive nature of their businesses, which is a real positive given the economic troubles brewing.
