The stock market is picking momentum as falling interest rates increase hopes of recovery. While the growth stocks were quick to catch up to the momentum, some income stocks are still trading closer to their multi-year lows. This is because interest rate cuts take time to seep into the economy and show results.
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A once-in-a-decade opportunity to buy income stocks
Here is a once-in-a-decade opportunity to buy the dip of some income stocks and lock in a higher dividend yield for a long time. A higher yield clubbed with stock price recovery could help accelerate your passive-income portfolio.
Telus stock
Value investors often look for stocks with strong fundamentals but are undervalued by the market due to short-term headwinds. And Telus (TSX:T) is one such stock. The entire telecom sector has undergone consolidation after the Rogers and Shaw merger. The market has now found its new normal. Telus, which has been actively rolling out 5G infrastructure, saw a significant surge in capital spending when interest rates were at their decade-high. Hence, Telus stock dropped to its 2016 level of closer to $20.
With a debt of $28.15 billion on its balance sheet, the telco was paying $1.33 billion annually in interest expenses. This burdened its cash flows and net income. Its dividend-payout ratio surpassed its target range of 60-75% and stood at 83% in June 2024.
However, the worst is over for the telco. The Bank of Canada’s speedy rate cuts could bring significant relief to the net profit. The rollout of 5G and investment in artificial intelligence (AI) could open new revenue streams in the cloud space. You could consider investing a lump sum in this stock and lock in a 6.8% annual dividend yield.
Consider investing in Telus’s dividend-reinvestment plan (DRIP) with a 10-year horizon. The management plans to grow its dividend by 7% annually, with a 3-4% growth every six months. The 5G opportunities are several times bigger than 4G. The 5G technology can enable AI at the edge, giving Telus ample scope to grow its dividend over the next 10 years.
RioCan REIT
RioCan REIT (TSX:REI.UN) is another good income stock to buy now. While it does not have the most attractive dividend history, it has an attractive property portfolio with a diversified tenant base, with no single tenant accounting for more than 5% of rental income. RioCan slashed its dividend during the pandemic as lockdowns affected its rent. However, the revised distributions give RioCan a lower payout ratio of 61.5% of funds from operations.
RioCan is well-placed to generate good returns in a bull market as the majority of the real estate investment trust’s (REIT’s) properties are located in the Greater Toronto Area, which attracts higher rent. While grocers do not attract higher rent, specialty retailer stores do. Looking at the book value of the assets, one unit of the REIT is worth $25.02, and the REIT is trading at $20.5 at the time of writing this article.
The market is still discounting the REIT’s unit price below its pre-pandemic levels of $26-$28. As the property market revives, the fair market value of RioCan’s property portfolio would appreciate, driving the unit price to pre-pandemic levels.
By investing in RioCan now, you can lock in a 5.45% yield and a 30-36% capital-appreciation opportunity.
Investor takeaway
While Telus can compound your returns with DRIP and dividend growth, RioCan can grow your money through capital appreciation and modest dividend growth.
