Economists are predicting a recession in Canada and the United States by 2024. So, you can’t be too careful about your investments right now. Since 2022, interest rates have gone up meaningfully, increasing the cost of capital for businesses and reducing the returns of investments.
On the bright side, investors are able to invest their short-term capital in traditional Guaranteed Investment Certificates (GICs) for higher fixed income with no worries about the safety of their principal. Currently, the best one-year GIC interest rate is 5.95%. That’s certainly a much better return than when interest rates were close to 0%. For example, if you’re buying a car a year later, it makes good sense to place your savings in a GIC for higher interest income than in a savings account.
For long-term capital, you can invest in quality stocks. Thanks to commission-free trading platforms like Wealthsimple, investors can now easily diversify their portfolios. If you were purely investing $6,500 of money you don’t need for the next five years or longer, you could consider reasonably valued blue-chip stocks like Bank of Montreal (TSX:BMO) and Canadian National Railway (TSX:CNR).
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BMO stock
BMO stock has declined about 20% from its peak in 2022 and consolidated in a sideways channel since mid-2022. Its stock price action has been weak because of a less-favourable economic outlook from rising interest rates, which is dampening economic growth.
Preparing for an upcoming recession, the North American bank has been increasing its loan-loss provisions, which is cutting into its earnings. Fiscal year to date, the bank’s adjusted provision for credit losses jumped to $1,027 million from $87 million a year ago. Ultimately, the adjusted earnings per share fell 12% to $8.93, and the adjusted return on equity dropped to 12.6% versus 16.0% a year ago.
This scenario is what’s been pressuring the bank stock. So, investors could buy shares at a higher-than-normal dividend yield of 5.1% in a quality company. Notably, the bank has a large reserve of retained earnings that could act as a buffer to protect its dividend if needed.
At $115.69 per share at writing, BMO stock trades at a discount of about 14% from its normal long-term valuation. So, it’s probable for the dividend stock to deliver compelling double-digit returns over the next five years when the economic outlook improves.
CN Rail stock
Canadian National Railway stock has been stuck moving sideways since late 2021. The quality stock’s valuation was high at a multiple of about 28 times earnings in late 2021. So, this sideways action is actually a demonstration of its stock price strength. After a period of consolidation, its earnings have somewhat caught up to its price. At $153.34 per share at writing, the railway stock trades at a reasonable valuation of below 21 times earnings.
It won’t bode well for CN Rail in a recession, but the stock does pay a dividend yield of north of 2%. Although it’s easy to get caught up in its recent price action, which seemed to have done nothing, CN Rail stock has actually been a long-term reliable compounder of wealth.
For instance, in the last 10 years, it delivered market-beating total returns of approximately 13% per year. It also increased its dividend by 14.6% in the past 10 years. It’s not a bad time to buy some shares in CN Rail, which should make you wealthier for the long haul.
