Guaranteed Investment Certificates (GICs) have been incredibly rewarding risk-free plays in recent years, thanks in part to much higher interest rates. With the latest cut from the Bank of Canada (BoC), though, the best days of GICs may very well be in the rearview mirror.
GICs are still good, but are they as good as last year?
Of course, Canada’s central bank could certainly run the risk of cutting rates by too much, too soon in the game, allowing inflation to make a reappearance. That said, I think such a scenario is unlikely at this juncture. Moving ahead, I’d look for the BoC to be just a bit more data-driven and cautious when it comes to its second and third cuts. After all, inflation is a beast that you do not want to let rest and recover.
Additionally, too many rate cuts could weigh heavily on the Canadian dollar, especially if the BoC’s second cut comes before the U.S. Federal Reserve’s first. Indeed, it may make more sense to let the Fed catch up before continuing with more rate cuts. Either way, rates officially seem to be in a downtrend. And every move lower will mean new GICs won’t yield nearly as much as they used to.
It can pay dividends to own Canadian dividend stocks!
While still bountiful, I think investors should come to terms with the likelihood that their GICs may have a markedly lower rate when it comes time to renew for another multi-month or multi-year term. Indeed, rates north of 5% have spoiled risk-off passive-income investors.
As 4% and eventually 3% rates become standard with one or two-year-long GICs, perhaps it makes sense to “lock in” a swollen dividend with one of the Canadian dividend stocks instead. If no dividend cut happens, the dividend you’ll get today will likely be the same (or much higher after a few dividend hikes) a few years from now, regardless of how low interest rates fall!
In this piece, we’ll look at two intriguing Canadian dividend stocks that I’d look to pick up if you’re at all worried that GIC rates are going down, perhaps markedly down, in the coming 18-24 months.
Telus
Telus (TSX:T) is starting to gain a bit of speed, with shares up more than 4% since the late May lows. Indeed, not a heck of a lot has changed about the telecom top dog over the past week and change. The BoC’s rate cut, which was not a surprise, seems to have investors reaching for T stock and its huge nearly 7% dividend yield. After a nice bump higher, the yield is around 6.81%. Still attractive and likely to fall further as investors look to pursue income stocks while they’re still on sale.
The high-rate world won’t last forever, nor will today’s massive yields on telecoms. With a growth-focused mindset and some financial flack in a falling-rate environment, T stock is one of my favourite dividend studs to buy now. Who knows?
A double-bottom technical pattern could be in the works. If it comes to fruition, the stock could find itself back above $26 per share by year’s end. Either way, I like the stock for lovers of passive income.
