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The rising interest rate has made bank deposits and bonds attractive. But these rate hikes are likely to pause, as they are putting a strain on lenders by increasing credit risk. While Canada is witnessing a 4.5% bank rate, its highest interest rate in a decade, there is something even more attractive. Some dividend stocks offer yields of 5% and a dividend growth of 3-7% in the coming few months.
TSX dividend stocks versus fixed deposits
Canadian banks offer interest rates between 3.25% and 4.55% on one-year fixed deposits. While fixed-income deposits have lower risk, dividend stocks can give you better passive income for a little risk. Let’s understand the risk/return tradeoff between fixed deposits and safer dividend stocks.
- The interest rate is at the central bank’s discretion, while the dividend is at the company’s management’s discretion. They both can change depending on the market conditions.
- You can lock in an interest rate till the maturity of the deposit. You can lock in dividend yield till the company cuts dividends.
- One fixed-deposit instrument can give you a pre-determined interest rate, whereas a dividend stock can give you a higher dividend on your initial investment if the management grows the dividend per share.
- Both fixed deposits and dividends are exposed to credit risk of the issuer. However, Canada Deposit Insurance Corporation insures certain fixed deposits up to $100,000.
For a little risk, some dividend stocks can offer better returns, giving you an alternative to diversify your investments across different asset classes.
Two TSX dividend stocks that offer better passive income than fixed deposits
I have identified two TSX stocks that could grow their dividends in the coming quarter, allowing you to earn better passive income that can beat inflation.
Telus
Canada’s third-largest telecom giant Telus (TSX:T) has been growing dividends for the last 18 years. Although its dividend-growth rate has slowed from over 30% in 2005 to 7% in 2023, the growth rate can beat a 6% inflation. The company has completed its 5G infrastructure and expects higher cash inflows. The management expects to increase the annual dividend by 7-10% in the 2023-2025 period.
If you are worried about Telus’s high dividend-payout ratio in 2021 (142%) and 2022 (95%), it was because of high capital spending in next-generation technology. This spending will bring returns in the coming years, as 5G adoption increases and connects more devices to the internet. The payout ratio could reduce to 60-75% of free cash flow, enabling the management to announce more such dividend-growth periods.
Telus is trading at its average trading price of $28.3. If you invest now, you can lock in a 4.97% yield. The management has been increasing dividends bi-annually. It increased the dividend by 5% in the first half. To achieve its planned 7-10% increase, Telus might increase it by 3% in the second half.
A $5,000 investment in Telus now could buy you 177 shares and give you a total passive income of $810 in three years.
CT REIT
Another source for growing passive income is CT REIT (TSX:CRT), the real estate arm of Canadian Tire. Unlike other real estate investment trusts (REITs), CT REIT has been growing its distributions annually in July, as it enjoys a higher occupancy rate for its stores. The REIT’s average distribution-growth rate is around 3%. So far, it has maintained the payout ratio at 74.5%, with no major debt maturities in 2024. These figures hint that the REIT has the financial flexibility to grow its distribution without impacting its cash flows.
The rising interest rates have strained property prices, pulling CT REIT’s stock price down by 13% since March 2022. It is a good time to lock in a 5.4% distribution yield and a 3% distribution growth this year.
A $5,000 investment in CT REIT now could buy you 314 shares and give you a total passive income of $867.5 in three years, assuming the REIT maintains a 3% distribution growth.
