Are rising prices eating up your monthly income? Is the salary hike you got last year struggling to keep up with the 6.8% inflation (April 2022 figure)? Such times remind you of the need for a stable monthly income. Like most Canadians, if you saved up the stimulus money in income stocks during the pandemic, you locked in a higher distribution yield. That could probably help you with one expense.
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How to prepare for stagflation
The market downturn has brought a similar opportunity to you in June 2022. This month, most dividend stocks could bottom out, as warning bells of stagflation create panic in the stock market. Stagflation is an economic situation where rising prices start affecting consumer demand and slowing economic growth. Early signs of stagnation are visible, as pandemic savings are fast depleting, and U.S. savings rates hit a low, despite rising interest rates.
Four income-yielding stocks to buy in stagflation
The contrarian approach is to do the opposite. Buy when others are selling and invest when others are spending. Now is the right time to invest for hay day, because things could get tough for consumers and businesses in the future. Here are four stocks that could survive a tough economy and pay dividends regularly, helping you with monthly expenses.
- Canadian Natural Resources (TSX:CNQ)(NYSE:CNQ): 4.52%
- BCE (TSX:BCE)(NYSE:BCE): 5.57%
- SmartCentres REIT (TSX:SRU.UN): 6.73%
- Slate Office REIT (TSX:SOT.UN): 8.39%
Energy and utility companies enjoy stable cash flows
No matter how expensive oil and natural gas get, cold winters need heating solutions. The supply shock in these industries has inflated oil prices above US$100. Oil companies have even discontinued derivatives they use to hedge themselves from the risk of a price drop. Canadian Natural Resources gives Canada the energy security it needs in times of energy crisis. Moreover, the geopolitical tensions in Eurasia have made Canada a favourable ally to export oil and natural gas to Europe and the United States.
It will take at least a year for oil and gas prices to normalize. And with winter approaching, seasonal demand could peak. Canadian Natural Resources stock could appreciate your capital in the short term while giving you a dividend yield of 4.5%.
Telecom giant BCE is the utility of the digital age. While consumers are cutting down on discretionary items, they might increase their broadband subscription, as the internet offers a cheaper alternative to travel and entertainment. Stable subscriptions could help BCE maintain regular dividend payments and even continue its 5% dividend growth.
REITs are a good source of stable monthly income
Other than utilities, real estate is a good income source. However, REITs are more exposed to economic conditions than energy. Rising interest rates have slowed house prices. People are thinking thrice before buying a house in this economy. A looming recession could pull down property prices and cause a fallback in REIT prices. But it won’t affect rental income in the short term.
Amid fears of recession, I am suggesting a contrarian approach to buying commercial REITs. SmartCentres and Slate Office face the risk of reduced occupancy or rental delays if the weak economy affects the business cycle. Many offices and retail stores could resort to cost cutting by closing any additional branches. And it is due to this risk that they have distribution yields of 6.7% and 8.4%, respectively.
While Slate cut its distribution once during the pandemic, SmartCentres didn’t. The latter also survived the 2008-09 financial crisis without a distribution cut. In the best-case scenario, they could provide a stable monthly income. In the worst-case scenario, they could reduce their distribution by a third or half. But they will continue to pay distributions.
How much income can you get?
If you invest $2,000 in each of the four stocks, you can earn a stable monthly income of $42. This amount may look small in the short term, but it can grow in the medium and long term. Moreover, your $10,000 could grow to more than $12,000 as the economy recovers.
