There are still plenty of places to get yield, value, and newfound momentum, even as the price of admission for quality looks set to rise. Undoubtedly, chasing dividend yield by way of a screener is seldom a good idea, especially if you’re looking to narrow in on the names with yields north of the 5% mark. Of course, when rates were quite a bit higher around two years ago, when the yield bar was a bit higher, one could safely go after the 5% or even the 6% yielders without having to worry about the potential for huge dividend reductions.
In any case, we’ve seen the broad TSX Index and the blue-chip dividend payers rise by leaps and bounds over the past year and a half. And while I wouldn’t sit around waiting for the names to drop and yield something closer to their three-year historical averages, I do think that it makes sense to be pickier as a DIY investor when it comes to value. Of course, whether 3–4% is the new 5% remains to be seen.
With worries sweeping through the S&P 500 over inflation and the potential for rate hikes under the new Fed chairman, questions linger as to whether central banks are looking to move on from this rate pause towards hike mode again. Indeed, the broad markets took on a bit of a hit as investors weighed the potential for rate hikes to be on the table as the inflation data comes in hot. On this side of the border, inflation, especially food inflation, is still, in my opinion, way too high.
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Rate hikes now likelier than cuts?
And as the data comes in hotter (I think there’s a pretty good chance of this), the Bank of Canada’s next move (after its pause) might also be a hike. Personally, I think it makes sense for the Bank of Canada to follow the Fed’s lead. And as we do enter a climate where the rate hikes could climb again, I do think investors should be ready for volatility as share prices on certain stocks come down while their yields look to march higher again.
Now, I don’t think another 2022 market dip is on the table, but, for the most part, I think dollar-cost averaging (DCA) could be the way to go for dividend investors. When you look past the rate uncertainty, there are several tailwinds (think AI productivity) that might make the case for cuts attractive, especially as the layoffs (especially in tech) look to keep on coming in. It’s a hard balance to make, but I do think a prolonged pause might also be a good way to go. On the one hand, there’s inflation, and on the other hand, there’s the potential for a bit of stagnation.
Telus stock stands out
One name that I think could be worth checking out is Telus (TSX: T), which has a 9.8% dividend yield at the time of this writing. Shares are sliding again, and they could be headed right back to 52-week lows in the mid-teens. Of course, there are a lot of headwinds, and the dividend is starting to look like a very hefty commitment that might take away from the firm’s comeback plans.
Either way, I think Telus is on the right track as it looks to AI as not only a source of operating efficiencies (cost savings), but a potential sales growth driver. Any way you look at it, I think Telus is an efficiency unlock kind of play. And one that I wouldn’t underestimate, as firms across the board embrace AI labour.
