Looking for cash? Dividend stocks do seem like the right answer, but only if you find the right ones. That’s why today we’re looking at three dividend stocks that can survive the top headline of the moment: rate cuts. Rate cuts usually help dividend stocks by lowering discount rates and borrowing costs, often compressing cap rates. This supports valuations and dividend coverage. However, cuts can also signal weakening growth and may reduce cash flow. So let’s look at three that look like they’re solid dividend stocks in a prime position for future growth.
Source: Getty Images
CHP.UN
First up, we have Choice Properties REIT (TSX: CHP.UN), a real estate investment trust (REIT) focused on mixed use properties, including residential properties as well as consumer staples like Loblaw. The company has shown its strength again and again, most recently during second quarter earnings.
Lower borrowing costs and cap-rate compression would likely increase the company’s net asset value (NAV) per unit, improving adjusted funds from operations (AFFO) over net income coverage. With NAV per unit at $14.38, lower rates would improve this. The dividend stock also holds high occupancy at 97.8% at writing, with long-term grocery-anchored retail and well-located industrial assets. This gives it stable cash flow even in a downturn.
CHP also has large liquidity available with $1.3 billion in available credit and a $13.5 billion pool of unencumbered properties. With an active transaction pipeline and developments as well, the dividend stock is nothing if not solid. Investors will want to trade AFFO to make sure that the dividend keeps up, but as of writing it’s looking stronger as rates come down.
EIF
Next up, we have Exchange Income (TSX: EIF), a top aerospace and manufacturing stock that would also see benefits from lower costs. Lower borrowing means acquisitions and fleet financing would be cheaper. This is relevant considering it’s an acquisition-led company, recently closing Canadian North.
During the second quarter, EIF stock saw strong cash generation and record revenue. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) hit $177 million, with free cash flow at $123 million. Meanwhile, it remains strong and is getting stronger following rate cuts with lower financing and improved acquisition economics. The main risk would be a demand decline, but its recent Canadian North long-term contract minimizes that risk.
PPL
Finally, Pembina Pipeline (TSX: PPL) is a solid midstream energy company that would also benefit from lower interest expenses. This would have to do mainly with variable debt and cheaper project financing. Lower rates improve cash flows and returns on growth projects. And Pembina stock has a lot of projects in the works.
Lower discount rates and stable long-term contracted cash flows would also increase asset values and support its already high dividend yield. Meanwhile, the company is coming off strong second-quarter earnings, with strong adjusted EBITDA at $1 billion and adjusted cash flow from operations of $698 million. This robust cash generation can cover dividends and capital expenditures.
Bottom line
All three of these dividend stocks should continue to be favourable in a lower-rate environment. Each can lower financing costs and boost asset valuations, but context matters. Economic weakness could also mean that operating cash flow falls. However, all three should benefit materially. That being said, always consider your own portfolio goals before making any investment decisions.
