Most investors already understand that interest rates are one of the most important factors impacting the economy, the market, and how Canadian stocks are valued.
However, when interest rates fall, they don’t lift all stocks equally. Some businesses are only loosely impacted, while others are much more directly tied to borrowing costs, asset values, or how investors price their future cash flow.
And understanding that difference matters, because the same stocks that can benefit when the Bank of Canada cuts rates are often the same stocks that can struggle when rates rise.
That means two things. First, you want some stocks in your portfolio that are less sensitive to rates, which can help smooth out volatility.
But at the same time, it can also make sense to own stocks that are more sensitive to interest rates, as long as you believe in their long-term potential. Because not only can they benefit when rates start to fall, but if they’ve already been pressured by higher rates, you may be able to buy them today at a much more attractive valuation.
So, with that in mind, here are two Canadian stocks that are structurally positioned to benefit every time the Bank of Canada cuts rates and that still look compelling to buy today.
Governor Tiff Macklem; Source: Bank of Canada
A Canadian real estate stock tied directly to interest rates
There’s no question that one of the sectors most impacted by movements in interest rates is real estate, which is one of the main reasons why Canadian Apartment Properties REIT (TSX:CAR.UN) is one of the best stocks to buy now.
Real estate is a capital-intensive business, which means borrowing costs play a major role in profitability and growth.
So, when interest rates fall, it becomes cheaper for companies like CAPREIT to finance new developments, refinance existing debt, and expand its portfolio.
However, that’s just one part of the equation. The other major factor to consider is that as rates decline, the value of income-producing real estate tends to increase.
Falling interest rates mean that yields from bonds and other fixed-income investments become less attractive, which often drives more investors toward assets like REITs, sending the price of stocks like CAPREIT higher.
That’s why residential REITs like CAPREIT often see their share prices move higher as interest rates fall. And more importantly, it’s why you can buy CAPREIT at such a compelling valuation today.
Not only does it currently trade at a forward price-to-adjusted funds from operations ratio of 15.1 times, well below its 10-year average of 23.5 times. But in addition, it currently offers a yield of 4.7%, which is also significantly higher than its 10-year average forward yield of 3.3%.
So not only is CAPREIT one of the best stocks on the TSX that can benefit every time the Bank of Canada cuts rates, but it’s also one of the top stocks long-term investors can buy today.
A long-term growth stock with years of potential
In addition to real estate, businesses that rely heavily on long-term projects and future cash flow, such as Brookfield Renewable Partners (TSX:BEP.UN) can also benefit considerably as interest rates decline.
For example, Brookfield Renewable owns and operates a global portfolio of renewable energy assets, including hydroelectric, wind, and solar power. These are long-life assets that generate steady, contracted cash flow over many years.
And that’s the key because when interest rates decline, the value of those long-term cash flows increases.
Furthermore, on top of that, Brookfield Renewable is constantly investing in new projects, and like real estate, those projects require significant capital.
So, when borrowing costs come down, it becomes easier and more attractive to fund new developments, which supports long-term growth.
At the same time, just like CAPREIT, its yield becomes more attractive relative to bonds, which can also drive increased demand from income-focused investors.
So as interest rates decline, Brookfield benefits from lower financing costs, improving valuations, and stronger demand for its income. And right now, not only does Brookfield offer decades of growth potential as the world transitions to cleaner energy, but it also offers a current yield of 4.6%.
So, if you’re looking for reliable long-term Canadian stocks to buy and hold that can benefit as interest rates decline, Brookfield is undoubtedly a top choice.
