The Bank of Canada didn’t announce any new rate cuts this week, deciding to keep the interest rate at 2.25%. While the absence of a cut was expected, the current environment of rate cuts does have a trickle effect on some businesses.
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What happens when rates are cut?
When the Bank of Canada announces rate cuts, borrowing becomes cheaper. This makes it easier for companies with larger debts. For dividend investors, rate cuts raise questions about whether dividends remain sustainable in a tightening fiscal environment.
Fortunately, there are plenty of great stocks in Canada to weather such a storm. Examples of this include the big banks, utilities, pipelines, and certain REITs.
Here’s a look at two options for investors to consider that will not only survive rate cuts but thrive under them.
Canadian Natural Resources
Canadian Natural Resources (TSX:CNQ) is one of the largest oil and gas producers in Canada. The company is well known for its diversified oil and gas business, which includes assets in oil sands and conventional oil, as well as natural gas and natural gas liquids.
That mix gives Canadian Natural Resources multiple revenue streams to lean on, adding an element of diversification to weather volatile commodity prices.
This means that Canadian Natural Resources’ focus has been on long-life, low-decline assets such as the oil sands. Not only do these assets generate ample revenue, but they also require less ongoing capital to maintain production volumes.
That lower cost structure is exactly what gives Canadian Natural Resources an advantage in an environment where rate cuts become the norm.
Then there’s the dividend. Canadian Natural Resources can utilize those multiple revenue streams to generate a steady cash stream that allows it to invest in growth and pay out a quarterly dividend.
As of the time of writing, the company’s dividend works out to a handsome 5.2% yield.
Adding to that appeal is the fact that Canadian Natural Resources has provided annual upticks to that dividend for two decades without fail.
This makes it an excellent long-term option for any portfolio, and not only when there are rate cuts.
Granite REIT
Another great option for investors to turn to that will not only survive rate cuts but thrive under them is Granite REIT (TSX:GRT.UN)
Granite REIT is an industrial REIT that offers a portfolio of properties geared towards logistics, warehousing, and industrial properties. The REIT benefits from ongoing efficiencies and trends in e-commerce and supply chain modernization efforts.
Given the size and scale of Granite’s tenant base, the REIT typically seeks out multi-year leases with built-in rent escalators. This provides the REIT with a longer-term runway, which is helpful in an environment of rate cuts.
That predictable revenue stream also helps Granite plan out its distribution, which is another key point for investors to consider. REITs like Granite derive their payout from adjusted funds from operations (AFFO).
Granite has kept its AFFO at levels that allow a buffer between what it earns and what it pays out. That buffer can help in an environment of rate cuts.
REITs are capital-intensive businesses that carry a lot of debt. If interest rates continue to fall, that can lead to a growing AFFO over time.
That growth can spill over into Granite’s monthly distribution, which currently yields a respectable 4.4%.
Rate cuts: good or bad?
Stocks like Canadian Natural Resources and Granite offer predictable cash flows, conservative payout ratios, and plenty of long-term stability. This makes them ideal picks when rate cuts happen.
Throw in a healthy dividend, and you have some of the best defensive options for any long-term portfolio.
Buy them, hold them, and watch them grow (while interest rates fall).
