Tim Hortons parent company Restaurant Brands International is one dividend stock that could benefit from lower interest rates, as consumers have more disposable income.Fred Lum/The Globe and Mail
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Canadian dividend stocks that may have struggled when interest rates were rising now have the wind at their backs.
The Bank of Canada has reduced its policy interest rate twice this year to 4.5 per cent amid cooling inflation, and another cut is expected on Sept. 4. The U.S. Federal Reserve is expected to make its first cut next month.
Bond proxies such as real estate investment trusts (REITs) have started recovering, and falling rates can help other dividend payers, too.
The Globe asked three fund managers to provide their top picks among dividend stocks that should benefit from rate cuts:
Robert Lauzon, chief investment officer and portfolio manager, Middlefield Capital Corp. in Toronto
The fund: Middlefield Income Plus Class
The pick: Enbridge Inc. ENB-T
Mr. Lauzon says shares of the Calgary-based oil and gas pipeline giant have been recovering lately due to falling rates.
“We think there is still 8 per cent upside with almost a 7-per-cent yield [now], so a 15-per-cent total return is ideal for my playbook,” he says.
He says North American-focused Enbridge has raised its dividend for 29 consecutive years. “That shows how stable its business is.”
Lower rates will reduce debt refinancing costs, he says, adding that interest in Enbridge should grow as investors increasingly seek yield.
Enbridge, which acquired three U.S. companies last year, is now North America’s largest gas utility. Mr. Lauzon expects the company will also benefit from rising natural gas demand to power artificial intelligence data centres.
The company’s shares have struggled in recent years, partly due to approval delays for its Line 3 pipeline replacement in Minnesota. Regulatory decisions in various jurisdictions are a risk, he says.
Enbridge trades around 11 times enterprise value (EV) to earnings before interest, taxes, depreciation and amortization (EBITDA). “We think it should trade at 12 to 13 times (EV/EBITDA),” Mr. Lauzon says.
The pick: Chartwell Retirement Residences CSH-UN-T
Mr. Lauzon says Chartwell Retirement Residences REIT will benefit from falling interest rates, which will reduce refinancing costs for its debt load.
Units of the Mississauga, Ont.-based retirement home operator have had a “nice run,” he says, but are still trading below the company’s estimated net asset value of $14.50 to $15 a unit.
Chartwell struggled in recent years because of deaths related to the COVID-19 pandemic and residents leaving to stay with families.
Its occupancy rate fell to 78 per cent in 2022 but has climbed back to 88.2 per cent. Chartwell is targeting a 95-per-cent occupancy rate by late 2025. Mr. Lauzon expects rising demand from aging baby boomers looking for accommodation and a lack of supply since fewer facilities have been built in recent years.
He says the risks range from another serious virus affecting occupancy and a recession causing people to stay in their homes longer.
Bunty Mahairhu, portfolio manager and research lead for equities, CI Global Asset Management in Toronto
The fund: CI Canadian Dividend Fund
The pick: Restaurant Brands International Inc. QSR-T
Restaurant Brands is a compelling play because its key brands – Tim Hortons, Burger King and Popeyes Louisiana Kitchen – are still growing market share in a tough economy, Mr. Mahairhu says.
The Toronto-based company has franchise agreements with more than 30,000 restaurants, with 85 per cent of sales in North America.
“This is also a very capital-light business,” he says. “The franchisees grow system sales, and Restaurant Brands doesn’t have a huge expense associated with it.”
Falling interest rates will reduce financing costs for franchisees participating in the Burger King program to modernize its restaurants, which should accelerate growth, he says. And lower rates should help drive sales growth as consumers should have more disposable income.
He says shares of Restaurant Brands are attractive, trading at around 19.2 times forward earnings, versus its five-year median valuation of 21.6 times. Its stock also trades at a discount to its peer group.
Risks include a recession that would hurt consumer spending and could lead franchisees to delay renovations.
The pick: EQB Inc. EQB-T
This digital financial services company is an appealing investment because of its fast-growing Equitable Bank and diversification in its offerings, Mr. Mahairhu says.
Toronto-based EQB, which owns Canada’s seventh-largest bank that bills itself as this country’s “challenger bank,” has managed risk well and “delivers industry-leading profitability,” he adds.
“EQB has had a consistent return on equity of 15 to 17 per cent for more than 10 years.”
In addition to deposit-taking, its bank provides residential and commercial loans. Falling interest rates should stimulate lending activity and reduce the risks of mortgage defaults, he says.
Equitable Bank is targeting 8- to 12-per-cent profitable loan growth this year, while the Big Six banks see “muted loan growth,” he adds.
EQB’s non-interest income, which includes wealth management through ACM Advisors, is 16 per cent of total revenue, so there is a “big runway” to grow that business, he says.
A recession and a housing market downturn are risks to EQB.
He says EQB’s shares are a good value, trading at eight times forward earnings versus 10.4 times for the S&P/TSX Composite Index Banks.
Michael Simpson, portfolio manager, NCM Asset Management Ltd. in Toronto
The fund: NCM Dividend Champions
The pick: Jamieson Wellness Inc. JWEL-T
The vitamin and supplements manufacturer is a leader in Canada but now also has “tremendous opportunities” for growth in the United States and China, Mr. Simpson says.
Toronto-based Jamieson Wellness sells products under six different brands, including Jamieson, Iron Vegan and Youtheory. The latter was acquired as part of a U.S. acquisition in 2022. Jamieson gets 53 per cent of sales from Canada and 26 per cent from the U.S.
The company has a reputation for quality manufacturing and should benefit from an aging population trying to stay healthy, Mr. Simpson says.
Jamieson should also benefit from falling rates because consumers will have more disposable income to spend on its products, he says.
Mr. Simpson says lower rates will also help reduce Jamieson’s cost of financing when seeking acquisitions. It will also reduce borrowing costs for private equity or other investors potentially seeking to purchase Jamieson.
A risk for this stock is a recession, or the potential loss of a major customer, such as a drugstore chain.
Jamieson’s shares trade at around 16 times forward earnings, which Mr. Simpson says is reasonable for a non-cyclical growth company.
The pick: Granite Real Estate Investment Trust GRT-UN-T
This industrial REIT will benefit from the e-commerce trend and onshoring as companies shorten and diversify supply chains, Mr. Simpson says.
Toronto-based Granite REIT has 138 warehouse and logistical distribution properties across North America and Europe.
It was spun off from auto-parts giant Magna International Inc., which now represents 19 per cent of gross leasable area.
He says dropping rates will reduce Granite’s cost of capital for financing new projects and maturing debt.
The REIT has struggled due to rising interest rates, concerns about a slowing economy and overbuilding in the U.S. market, but Mr. Simpson says industrial properties, except for certain small markets in the U.S., are in short supply.
A recession and overbuilding are the main risks for the REIT.
He says Granite units are attractive, trading at about 12.4 times funds from operations, which is a key measure of cash flow for REITs.
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